Gaskill V. Robbins, Goodwill In Business Value, 50/50 Property Division

DATE RENDERED: 2/13/2009

SC considered whether the goodwill of a closely held or sole proprietorship business can have both personal and enterprise values, and whether TC improperly assumed that it must make a 50-50 division of the marital assets.

During the marriage, Wife worked as owner and sole practitioner of an oral and maxillofacial surgery practice, while Husband worked as a salaried employee with several businesses. At the time of trial, the parties had amassed a marital estate of over $4 million, including the value of the practice at about $670,000. Wife earned about 90% of the income during the marriage, and testimony indicated that she was very hard-working and responsible both for management of the office and patient acquisition, although Husband did provide minor assistance with the business. At trial, Wife’s expert testified that, on an asset-based analysis, the practice was worth about $221,000, which included a value of $0 for goodwill of the business because Wife’s role in the business amounted to a “non-marketable controlling interest.” Husband’s expert used the average of the values derived from four different methodologies, assuming the existence of Wife’s non-compete agreement and goodwill, and arrived at a value of $670,000. TC accepted Husband’s expert’s valuation, relying on the premise that there was no authority for the distinction between personal and enterprise goodwill in Kentucky law. CA reversed on TC’s goodwill ruling because it believed TC was under incorrect impression that goodwill must be assigned a value greater than $0, and it recognized that not all businesses have goodwill.
TC determined that marital property should be divided 50-50, relying on the parties’ equal contribution to the marital estate, including duties at home and raising their child, as well as Wife’s greater ability to rebuild her estate.

Valuation of Goodwill:
If the reputation of a business will draw customers and get them to return, the business has goodwill. Previous KY cases recognize that everything of value in a business, including transferable goodwill, must be counted. None of those cases recognized a distinction between personal and enterprise goodwill, but they did not prohibit the distinction. Enterprise goodwill is based on the intangible, but generally marketable, existence in a business of established relations with employees, customers, and suppliers. On the other hand, much like professional degrees, personal goodwill is nontransferable, belonging primarily or only to the individual. If the value of a business is to be decided on a fair and reasonable basis, and property divided equitably, this must be considered. SC found that the skill, personality, work ethic, reputation, and relationships developed by Wife are hers alone and cannot be sold to a subsequent practitioner. This personal goodwill is nonmarital property that will continue with her regardless of the presence of any spouse. SC held that to consider this personal goodwill as marital property would effectively attach her future earnings, to which Husband has no claim. Further, if Husband were then awarded maintenance, this would amount to double-dipping and cause a dual inequity to Wife. Lastly, SC recognized that the distinction between enterprise and personal goodwill is as susceptible to expert valuation as goodwill on the whole is.
Valuation Methods:
SC held that using an average of values to obtain a value of a business, without some basis other than an inability to choose between conflicting and competing valuation methods, is nothing more than making up a number, for there is no evidentiary basis to support that specific number. The trial court must fix a value, and there should be an evidence-based articulation for why that is the value used. Further, the business must be valued in its existing state, and a non-existing non-compete clause cannot be considered.
Equitable Division of Marital Property:
TC recognized that there is no presumption of a 50-50 division without regard to the evidence. However, SC held that because a court must divide the property in “just proportions,” starting the parties off in an even position in order to determine how to apportion is not unreasonable, provided that TC considers all the relevant factors of KRS 403.190. This statute requires consideration of each spouse’s contribution to acquiring the marital estate, and here, Wife clearly contributed more monetarily than Husband did. However, the ability to work with the support of a spouse/co-parent is an intangible that goes beyond dollars. Within the marital arrangement, abilities are often unequal, the use of one’s time varies according to present need, and each spouse does things to accommodate the other. How the parties earn money and build wealth is affected by these variables, but is done for common purpose. Thus, SC held, the term “contribution” has tangible and intangible components that must be weighed by TC. Furthermore, in its division of property, TC should also consider parties’ ability to earn after divorce, and Wife clearly has the advantage here.

CA’s decision re goodwill and TC’s valuation and division of practice affirmed on other grounds, and TC’s 50-50 division of property affirmed. Remanded to TC to determine value of practice and divide marital estate.

If expert testimony establishes that covenants not to compete are an integral part of a sale of a profession practice, as they typically are, the expert should be able to take them into account in assessing the value of the practice.

Digested by Michelle Eisenmenger Mapes, Diana L. Skaggs + Associates