ILNews

Column: Discussion on salable goodwill continues

September 28, 2011
Keywords
Back to TopCommentsE-mailPrintBookmark and Share
Indiana Lawyer Commentary

 

soshnick-andrew-mug Soshnick
alerding-jim-mug Alerding

By R. James Alerding and Andrew Z. Soshnick

On July 29, 2010, the Wisconsin Court of Appeals issued a decision that upheld the inclusion of salable professional (personal) goodwill in a marital estate in Wisconsin. In McReath v. McReath, 729 N.W.2d 89 (Wis. Ct. App. 2010), the husband (Tim) had an orthodontic practice, and admitted that he could sell his practice for just over $1 million. Nonetheless, Tim argued that most of that amount was attributable to non-divisible professional goodwill. The Court of Appeals disagreed and ruled that professional goodwill was includable in the marital estate to the extent that it is salable. The Court of Appeals emphasized that there was no rule in Wisconsin that specifically excluded salable goodwill from marital estates. The Wisconsin Supreme Court affirmed the McReath Court of Appeals decision and focused on interesting aspects of the difficult question of valuing personal goodwill. (“Professional” goodwill is understood to include “personal” goodwill.)

The Wisconsin statute does not specifically exclude professional goodwill. – Both Wisconsin appellate courts made clear that the Wisconsin statute did not exclude professional goodwill from marital estates. It would be surprising if any state statute specifically excludes professional goodwill from marital estates; Indiana’s Dissolution of Marriage Act certainly does not. In fact, most state statutes do not even address the issue of professional goodwill. As a result of this dearth of legislative guidance, the exclusion of professional goodwill from marital estates generally emanates from court decisions. Those court decisions have often focused on the issue of “future earnings.” Some states statutorily exclude as a marital asset in the marital estate the “future earnings” of either spouse. The theory that professional goodwill essentially represented future earnings has been espoused by a number of courts. The Indiana Supreme Court, in Yoon v. Yoon for example, “explained that because personal goodwill depends on the continued presence of the particular professional, it ‘represents nothing more than the future earning capacity of the individual.’”

So the clear inference is that, since there is not a statutory exception for the exclusion of professional goodwill from marital estates, courts must articulate a sound basis for excluding some or all professional goodwill. Usually that reason is because it is a part of future earnings. The McReath court now offers another reason for exclusion – “pure” professional goodwill is not salable and salable goodwill, whether personal or enterprise, is includable in a marital estate.

The McReath court chose “not to require circuit courts to draw a distinction between personal and enterprise goodwill when dividing a marital estate that includes professional goodwill.” This is a curious but soundly reasoned conclusion. As a practical matter, there is a distinction between “pure” personal goodwill, transferrable personal goodwill (or simply “transferable goodwill” because it is not truly personal if it is transferable), and entity or enterprise goodwill. This second class, or “transferrable personal goodwill,” is what is at issue in the McReath case. The Supreme Court implies the conclusion that transferrable goodwill will include enterprise as well as transferrable personal goodwill, thus eliminating the need to specifically identify enterprise goodwill when deciding the portion of total goodwill includable in the marital estate.

And why shouldn’t salable professional goodwill regardless of characterization be includable in a marital estate? Many states espouse that the standard of value is fair market value. Salable personal goodwill is, by definition, includable in the fair market value of the entity being valued. Therefore in theory at least, determining the FMV of an entity would by definition include both the entity goodwill and the salable personal goodwill. The Wisconsin Court of Appeals and Wisconsin Supreme Court clearly agree with this statement. If FMV is the standard of value, there is no reason to conclude other than salable professional goodwill of any nature is to be included in a marital estate. However, as has been seen time and again, states will declare that the standard of value is FMV and then proceed to make an exception for a particular item. Why don’t they just call it “FMV Except”?

The Wisconsin Supreme Court concluded that although the best indicator of (goodwill) would be an actual purchase price, it would not proscribe or preclude the use of mathematical computations to determine the value of goodwill. – The McReath court further said that the employment of such mathematical formulas appeared to be widespread. While this comment might seem trivial, it is potentially valuable to the work of valuation analysts. There has often been criticism from some in the legal community over the use of formulas instead of actual transactions in determining not only the goodwill portion of the value of an interest in a business, but also the overall value of a business interest. Of course, most of the criticism is misintended to advance a case-specific agenda. The fact is: Only the market approach of the three accepted approaches to value would satisfy the standard of either an actual transaction or a value derived from transactions or guidelines. Valuation analysts know that often in the valuation of smaller businesses the income approach or the cost approach is utilized in determining the value of a business interest – including the goodwill value. This framework appears to be the “mathematical formulas” referred to by the court. While, this conclusion seems obvious to valuation analysts, it nevertheless will be helpful going forward to have the obvious stated as clearly as it is by the McReath court.

So where does this decision leave us. First, while it is, of course, relevant to cite when it is useful to your position, McReath only has precedential value in Wisconsin. Notwithstanding that fact, various states seem to cite each other frequently in arriving at their own decisions. That precedent may serve as useful persuasive authority. Secondly, McReath clearly confirms that FMV includes value that can be transferred from a seller to a buyer. Again, valuation analysts have known that fact even though some professionals have parsed it out when valuing goodwill to be excluded in a marital estate.

The Indiana Supreme Court in Yoon clearly implied that salable goodwill is includable in the marital estate when it said that, “The goal in dissolution, however, is not to value the business (including the professional) for a buyer. Rather, it is to identify the portion of the value that is attributable to the business without the professional’s continuing participation.” Obviously, salable goodwill, by definition, stays with the business and does not remain with the professional. Therefore, there should be further discussions and opinions in Indiana related to salable goodwill, regardless of characterization being part of a marital estate, thanks to the Wisconsin Supreme Court’s advancement of the art of valuation in a positive direction.•

__________

R. James Alerding CPA/ABV/CFF, ASA, CVA (Clifton Gunderson, LLP) is a partner with the Valuation and Forensic Services national practice. Drew Soshnick is chairman of Baker & Daniels’ family law group. The opinions expressed are the authors’.
 

ADVERTISEMENT

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in Indiana Lawyer editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by
ADVERTISEMENT
Subscribe to Indiana Lawyer
  1. I have been on this program while on parole from 2011-2013. No person should be forced mentally to share private details of their personal life with total strangers. Also giving permission for a mental therapist to report to your parole agent that your not participating in group therapy because you don't have the financial mean to be in the group therapy. I was personally singled out and sent back three times for not having money and also sent back within the six month when you aren't to be sent according to state law. I will work to het this INSOMM's removed from this state. I also had twelve or thirteen parole agents with a fifteen month period. Thanks for your time.

  2. Our nation produces very few jurists of the caliber of Justice DOUGLAS and his peers these days. Here is that great civil libertarian, who recognized government as both a blessing and, when corrupted by ideological interests, a curse: "Once the investigator has only the conscience of government as a guide, the conscience can become ‘ravenous,’ as Cromwell, bent on destroying Thomas More, said in Bolt, A Man For All Seasons (1960), p. 120. The First Amendment mirrors many episodes where men, harried and harassed by government, sought refuge in their conscience, as these lines of Thomas More show: ‘MORE: And when we stand before God, and you are sent to Paradise for doing according to your conscience, *575 and I am damned for not doing according to mine, will you come with me, for fellowship? ‘CRANMER: So those of us whose names are there are damned, Sir Thomas? ‘MORE: I don't know, Your Grace. I have no window to look into another man's conscience. I condemn no one. ‘CRANMER: Then the matter is capable of question? ‘MORE: Certainly. ‘CRANMER: But that you owe obedience to your King is not capable of question. So weigh a doubt against a certainty—and sign. ‘MORE: Some men think the Earth is round, others think it flat; it is a matter capable of question. But if it is flat, will the King's command make it round? And if it is round, will the King's command flatten it? No, I will not sign.’ Id., pp. 132—133. DOUGLAS THEN WROTE: Where government is the Big Brother,11 privacy gives way to surveillance. **909 But our commitment is otherwise. *576 By the First Amendment we have staked our security on freedom to promote a multiplicity of ideas, to associate at will with kindred spirits, and to defy governmental intrusion into these precincts" Gibson v. Florida Legislative Investigation Comm., 372 U.S. 539, 574-76, 83 S. Ct. 889, 908-09, 9 L. Ed. 2d 929 (1963) Mr. Justice DOUGLAS, concurring. I write: Happy Memorial Day to all -- God please bless our fallen who lived and died to preserve constitutional governance in our wonderful series of Republics. And God open the eyes of those government officials who denounce the constitutions of these Republics by arbitrary actions arising out capricious motives.

  3. From back in the day before secularism got a stranglehold on Hoosier jurists comes this great excerpt via Indiana federal court judge Allan Sharp, dedicated to those many Indiana government attorneys (with whom I have dealt) who count the law as a mere tool, an optional tool that is not to be used when political correctness compels a more acceptable result than merely following the path that the law directs: ALLEN SHARP, District Judge. I. In a scene following a visit by Henry VIII to the home of Sir Thomas More, playwriter Robert Bolt puts the following words into the mouths of his characters: Margaret: Father, that man's bad. MORE: There is no law against that. ROPER: There is! God's law! MORE: Then God can arrest him. ROPER: Sophistication upon sophistication! MORE: No, sheer simplicity. The law, Roper, the law. I know what's legal not what's right. And I'll stick to what's legal. ROPER: Then you set man's law above God's! MORE: No, far below; but let me draw your attention to a fact I'm not God. The currents and eddies of right and wrong, which you find such plain sailing, I can't navigate. I'm no voyager. But in the thickets of law, oh, there I'm a forester. I doubt if there's a man alive who could follow me there, thank God... ALICE: (Exasperated, pointing after Rich) While you talk, he's gone! MORE: And go he should, if he was the Devil himself, until he broke the law! ROPER: So now you'd give the Devil benefit of law! MORE: Yes. What would you do? Cut a great road through the law to get after the Devil? ROPER: I'd cut down every law in England to do that! MORE: (Roused and excited) Oh? (Advances on Roper) And when the last law was down, and the Devil turned round on you where would you hide, Roper, the laws being flat? (He leaves *1257 him) This country's planted thick with laws from coast to coast man's laws, not God's and if you cut them down and you're just the man to do it d'you really think you would stand upright in the winds that would blow then? (Quietly) Yes, I'd give the Devil benefit of law, for my own safety's sake. ROPER: I have long suspected this; this is the golden calf; the law's your god. MORE: (Wearily) Oh, Roper, you're a fool, God's my god... (Rather bitterly) But I find him rather too (Very bitterly) subtle... I don't know where he is nor what he wants. ROPER: My God wants service, to the end and unremitting; nothing else! MORE: (Dryly) Are you sure that's God! He sounds like Moloch. But indeed it may be God And whoever hunts for me, Roper, God or Devil, will find me hiding in the thickets of the law! And I'll hide my daughter with me! Not hoist her up the mainmast of your seagoing principles! They put about too nimbly! (Exit More. They all look after him). Pgs. 65-67, A MAN FOR ALL SEASONS A Play in Two Acts, Robert Bolt, Random House, New York, 1960. Linley E. Pearson, Atty. Gen. of Indiana, Indianapolis, for defendants. Childs v. Duckworth, 509 F. Supp. 1254, 1256 (N.D. Ind. 1981) aff'd, 705 F.2d 915 (7th Cir. 1983)

  4. "Meanwhile small- and mid-size firms are getting squeezed and likely will not survive unless they become a boutique firm." I've been a business attorney in small, and now mid-size firm for over 30 years, and for over 30 years legal consultants have been preaching this exact same mantra of impending doom for small and mid-sized firms -- verbatim. This claim apparently helps them gin up merger opportunities from smaller firms who become convinced that they need to become larger overnight. The claim that large corporations are interested in cost-saving and efficiency has likewise been preached for decades, and is likewise bunk. If large corporations had any real interest in saving money they wouldn't use large law firms whose rates are substantially higher than those of high-quality mid-sized firms.

  5. The family is the foundation of all human government. That is the Grand Design. Modern governments throw off this Design and make bureaucratic war against the family, as does Hollywood and cultural elitists such as third wave feminists. Since WWII we have been on a ship of fools that way, with both the elite and government and their social engineering hacks relentlessly attacking the very foundation of social order. And their success? See it in the streets of Fergusson, on the food stamp doles (mostly broken families)and in the above article. Reject the Grand Design for true social function, enter the Glorious State to manage social dysfunction. Our Brave New World will be a prison camp, and we will welcome it as the only way to manage given the anarchy without it.

ADVERTISEMENT