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Susan Cutler filed an action for dissolution of marriage against her husband ofapproximately 20 years, David E. Cutler. After a trial, the court entered a judgment on allremaining issues. One issue was the determination of the value of David's business, theCutler Insurance Agency (Cutler). The court valued the business at $243,000 by applyinga form of the "income approach" method of valuation. This figure was then used indetermining the equitable distribution of marital property. David now appeals, arguing that(1) the court's valuation of the business was against the manifest weight of the evidence and(2) this error in valuation substantially and materially affected the equitable distribution ofmarital property. We reverse the decision of the trial court and remand the cause withdirections that $32,000 be used as the valuation of the business in the redistribution ofmarital property between David and Susan.

Susan filed a petition for dissolution on May 20, 1998. She and David had beenmarried since 1979 and had one child. Grounds for the dissolution were found on February9, 2000. At the trial on October 12, 2000, the witnesses included both of the parties, CharlesTzinberg as Susan's valuation expert, and Frank J. Reedy, Jr., as David's valuation expert. David also offered the evidence depositions of Larry McKenzie and Richard G. Eitzel, bothof whom were former owners of insurance agencies tied to Geico Insurance Company(Geico).

Susan testified that she was 44 years old and worked as a regional account managerwith Roche Labs. She has a bachelor of science degree in nursing. In 2000, she wasexpected to make approximately $97,000, which was consistent with her recent pastearnings.

David testified that he was 48 years old and was employed by Cutler, earning a grossincome of slightly more than $5,000 per month. The court found that his net income for thepurpose of child support was $3,637 per month. David graduated from high school butnever finished college. In 1973, David became a licensed insurance sales agent. He startedCutler as a proprietorship in 1988 and incorporated it in 1994. From 1988 to 2000, Cutlersold exclusively Geico insurance under an agency contract with Geico. Geico's principalproduct is automobile liability and comprehensive coverage. This agreement prohibitedDavid from representing any other company without Geico's written permission. In thetrade, this business relationship is known as a captive agency because of the agency'sexclusive arrangement with a single carrier. The contract also contained a one-yearnoncompetition clause prohibiting David from soliciting former Geico clients in the eventof a termination of the agency contract.

David testified that he was familiar with the agreement and understood the way itworked. He added that he had discussed aspects of the agreement with a number of otherGeico insurance agents throughout the country. In these discussions he learned that becauseof the contract terms these agencies were not marketable. He identified several agents whoclosed their agencies for various reasons, and none of them received funds as a result of thetermination.

David also explained that under the agreement with Geico he did not own hisrenewals in the agency, which meant that if he left, retired, or terminated the agency forsome other reason, he would not receive any commissions for ongoing business from hiscustomers. In contrast, an agent with an independent agency would expect to own hisrenewals when he left.

Charles Tzinberg testified for Susan on the issue of valuation. He received abachelor's degree from the University of Denver and has been a certified public accountantsince 1988. He works for a small accounting firm and spends most of his time doingaccounting work that does not involve business valuations. He admitted that there arerigorous programs where an accountant can get certifications in business valuation but thathe had not taken any of those courses or obtained any of those certifications. Tzinbergtestified that under the "market approach" of valuation the agency had a value of $270,000.

Tzinberg did not provide an opinion of what the fair market value of the agencywould be. He also did not analyze the agreement David had with Geico, explaining that hewas not qualified to determine whether the contract foreclosed the possibility of the sale ofthe agency. While Tzinberg agreed that Cutler is a captive agency, restricted from sellingother insurance products, he determined that the agreement itself was not material to thevaluation of the business.

In establishing a market value in this case, Tzinberg used a multiplier of grossrevenues as a rule of thumb. After researching a variety of sources for what he consideredto be comparative sales of insurance agencies, Tzinberg found multiples ranging between1 and 1.7. He decided to apply 1.3 times gross revenues to make a conservative estimate ofthe value. Tzinberg admitted that this rule of thumb was based on multiline agencies, whichCutler was not. Further, one source that Tzinberg relied on specifically indicated that thebusiness valuation should weigh the risk of losing a carrier contract with whether there wasa good mix of national, regional, and specialty-line carriers, allowing no more than 25 to30% of a "book of business" to be with any one carrier. Tzinberg admitted that he did notfactor these considerations into the valuation. He also admitted that the fact that the agencydid not own its own renewals would be relevant if the business were being sold to an outsidethird-party buyer.

Frank J. Reedy, Jr., David's valuation expert, was then called to testify at the trial. He is both a certified public accountant and a certified valuation analyst. He spends abouttwo-thirds of his time doing business valuations and damage measurements in legalsituations and has been doing this work for more than 10 years. Additionally, he attends 40to 60 hours of classroom instruction each year in the areas of business valuation, generalaccounting, and tax matters on both a local basis and a national basis. As a certifiedvaluation analyst, he can provide business valuations for small, closely held businesses andprofessional practices. In order to achieve that designation, Reedy attended courses andtraining and passed a 48-hour examination. Reedy explained that he had performed between100 and 200 business valuations, approximately two to four per month.

Reedy indicated that there were three commonly accepted methods used to value aclosely held business such as Cutler: (1) the market approach, (2) the income approach, and(3) the "asset approach." Reedy explained that he had used detailed financial informationin forming his opinion and had specifically reviewed the agreement between David andGeico because of the restrictions it imposed upon the business. After considering all threemethods, Reedy concluded that the asset approach was the appropriate method for thissituation. Under this method, the value of the agency was determined by subtracting thevalue of the business's liabilities from that of the assets. When Reedy applied this approach,he valued the agency at $32,000.

Reedy emphasized that it was significant that Cutler did not own its own book ofbusiness-the list of accounts that are expected to be renewed and be a source of futurecommissions. If Cutler were terminated, Geico could either place someone else in David'sposition or take the business directly back. David could not take that book of business toanother agency or combine it with another agency because it would revert to Geico. Reedyalso searched databases for comparable sales transactions for captive insurance agencies, buthe did not find any that were analogous. Additionally, he explained that because future cashflow was not within the control of the agency, the income approach was not an appropriatemethod of valuation.

Reedy concluded that Tzinberg's market approach valuation was improper becausehe did not first determine a fair market value but instead arrived at a value based upon "fairvalue," which is a more generalized approach. Fair value is a theoretically equitable amountrather than one derived via negotiations between two actual parties; thus, it would notconsider factors such as the restrictions imposed by the Geico contract.

Both Larry McKenzie and Richard G. Eitzel testified by way of evidence deposition. McKenzie lives in Elizabethtown, Kentucky, and worked as an independent captive agentfor Geico from March 1987 until July 2000. His contract with Geico was identical toDavid's. After he terminated his contract with Geico, he was not able to retain or own hisown business or solicit or contact his former customers. McKenzie did not receive anymoney when he disposed of his business in 2000. He was only paid the commissions onexisting renewals up to the date of his termination. He understood that, upon terminating,he had no vested rights and was unable to sell to another agent.

Richard G. Eitzel lives in Fairfax, Virginia, and worked for a captive Geico insuranceagency from March 1992 until June 2000. He also worked under an agreement identical toDavid's agreement with Geico. He took over his business from his father. His father wasnot able to do anything with the business once Eitzel began handling it. When Eitzel laterterminated his arrangement with Geico, he was unable to receive anything for his business.

The trial court found Cutler's value to be $243,000 and specifically stated it its orderas follows: "The value of [David]'s business is determined by the capitalized[-]returnsmethod, which the court finds reflects the most accurate value based on the continuingoperation of the business by [David] with no need to sell or abandon said business in theforeseeable future." The "capitalized returns" method is one form of the income approach. The court found the total of marital assets to be $680,738. Susan got $206,802 in maritalassets. The court distributed the marital home and several deferred pension assets, IRAs,and more than $25,000 in personal property to Susan and assigned her both the mortgageon the home and a $6,000 credit card debt. David got $261,936 in marital assets. The courtdistributed to David the value of the business, a small SEP pension, and approximately$7,300 in personal property. He was also assigned a $16,000 credit card debt. Davidappeals.

David argues on appeal that we must remand this cause because the trial court'sfinding that the value of Cutler was $243,000 is against the manifest weight of the evidenceand that this error in valuation substantially and materially affected the equitable distributionof the marital property in this case. We agree and remand for a redistribution of the maritalproperty using $32,000 as the valuation of the agency.

Section 503(d) of the Illinois Marriage and Dissolution of Marriage Act (750 ILCS5/503(d) (West 2000)) states that the court shall divide marital property in "just proportions." The first step, therefore, is to establish the value of such assets. In re Marriage of Grunsten,304 Ill. App. 3d 12, 17, 709 N.E.2d 597, 601 (1999). A trial court's determination of valuewill not be disturbed on appeal unless it is against the manifest weight of the evidence. Inre Marriage of Grunsten, 304 Ill. App. 3d at 17, 709 N.E.2d at 601.

Cutler is a closely held corporation, with David as its only shareholder and principal. This agency is what is known as a captive agency-which means that it can sell no line ofinsurance other than that of its principal, Geico-as opposed to a multiline insurance agency. David's exclusive agreement with Geico restricts the business in many ways. Under theagreement, David is limited to selling only Geico automobile insurance. If he were toterminate this agency agreement, David would not own his renewals, which means that hecould not obtain future commissions. Additionally, David cannot solicit his formercustomers for up to a year. If David were to dispose of his business, he could only transferthe Geico agency agreement with Geico's written permission. At the trial, David presentedundisputed evidence, by way of his testimony and two evidence depositions, that there issimply no market for Geico insurance agencies once an agent decides to terminate theagency agreement or Geico decides to terminate the agent.

The experts who testified at the trial applied two different methods of valuation andarrived at widely divergent values for the agency. Susan's expert, Tzinberg, used the marketapproach method and found the agency value to be $270,000. David's expert, Reedy, usedthe asset approach method and found the agency value to be $32,000. The trial court,however, rejected both of those opinions and found the value to be $243,000 based on acapitalized returns method-a form of the income approach method. The only reference inthe record to this amount was a passing statement made by Tzinberg, when he indicated thatafter determining that the value was $270,000 based on the market approach, he did a "sanitycheck" and applied a capitalized returns analysis, under which he found the value to be$243,000.

Courts of review have found it acceptable for a trial court to select a valuationbetween opposing values in evidence when a record contains conflicting evidence on thevaluation. See In re Marriage of Head, 273 Ill. App. 3d 404, 410, 652 N.E.2d 1246, 1251(1995). In this instance, however, the court's decision of a valuation between $270,000 and$32,000 was both arbitrary and against the manifest weight of the evidence, because one ofthe conflicting values was not based on evidence supported by a proper foundation. See Inre Marriage of Head, 273 Ill. App. 3d at 410-11, 652 N.E.2d at 1251. Tzinberg's valuationof $270,000 lacked a proper foundation. He based his valuation amount on the marketapproach, yet he failed to determine the fair market value of the agency. He relied insteadon a rule of thumb, which was clearly inapplicable to this situation. Fair market value isgenerally "measured by what a willing buyer would pay a willing seller in a voluntarytransaction." In re Marriage of Grunsten, 304 Ill. App. 3d at 17, 709 N.E.2d at 601. Thisapproach is based on the assumption of a hypothetical sale of the business. Tzinberg,however, admitted that he did not consider a sale of Cutler. Under his method, he valuedthe business without taking into consideration factors that would significantly affect the sale,such as the restrictions in the Geico contract. These restrictions clearly have a significantnegative impact on the fair market value of the agency. Because Tzinberg used this rule ofthumb (which applied to multiline or independent agencies), rather than actually determiningthe fair market value of the agency, we find that his valuation was not supported by properevidence. Thus, it was improper for the court to select a valuation between Tzinberg's andReedy's.

The Illinois Marriage and Dissolution of Marriage Act clearly stipulates that allmarital assets must be valued as of the date of the dissolution of the marriage. 750 ILCS5/503 (West 2000). In In re Marriage of Frazier, 125 Ill. App. 3d 473, 466 N.E.2d 290(1984), we specifically concluded that the application of the "capitalization of earnings"method was an improper way to value a business as a marital asset, because the calculationwould necessarily include as marital property labor which would be performed subsequentto the dissolution. The inclusion of expected future earnings of Cutler is improper in theconsideration of the distribution of marital assets in this case, and this error has produceda "grossly excessive valuation" (In re Marriage of Frazier, 125 Ill. App. 3d at 477, 466N.E.2d at 293). Based on our decision in In re Marriage of Frazier, we find that the court'sreliance on the valuation determined by the capitalized returns method was error.

Assuming, arguendo, that the method the court applied was proper, the court'sreliance on a single cursory reference to the value of the agency, absent any evidentiary basisfor the determination, was also against the manifest weight of the evidence. There is simplyno basis in the record to support a valuation based upon capitalized returns. Even Susan'sexpert, Tzinberg, stated that such a method does not apply to captive agencies and that hewould not use it in this instance.

In contrast to both the court's valuation and Tzinberg's valuation, Reedy's valuation,determined by applying the asset approach, was supported by proper evidence. While thetrial court expressly rejected $32,000 as the valuation of the agency, neither Susan nor thecourt disputed that figure as the asset value of the agency. We find that this was the onlyproperly proven value of the business, and we therefore accept that as the valuation for usein the distribution of the marital property.

The net value of the marital assets involved in this dissolution case was $452,557,which included the valuation of the agency at $243,000. Because the value assigned toCutler was over half of the net value of the marital assets, there is no doubt that the use ofthe erroneous valuation of the agency both substantially and materially affected the equitabledistribution of marital property between Susan and David. Therefore, we remand this causefor a redistribution of the marital property.

For the foregoing reasons, we reverse the decision of the trial court and remand thecause with directions that $32,000 be used as the valuation of the agency in theredistribution of marital property.

Reversed; cause remanded with directions.

WELCH and HOPKINS, JJ., concur.