Goodwill is a function of jurisdiction, appraiser says

Republished with permission from Business Valuation Resources (www.bvresources.com).

No two cases are alike, and different jurisdictions approach goodwill and noncompete agreements differently, cautions Jim Alerding (Alerding Consulting LLC), in response to the BVWire item on the Mauceri Texas divorce case, in which Bob Dohmeyer (Dohmeyer Valuation Corp.) was the prevailing expert. Therefore, it would be a mistake to make too many assumptions based on the outcome of a particular case.

Divorce is a state law issue, which means appraisers must know the particulars of the jurisdiction in which they practice, Alerding says. He calls the courts’ views on personal goodwill “fragmented.” He agrees with Dohmeyer that in Mauceri the issue of a covenant not to compete (CNTC) made a complex situation even more complex. “Bob,” he says, “was able to convince the court that the salable personal goodwill should be a part of the marital estate.” That approach comports with the Wisconsin Supreme Court’s decision in McReath, which also included salable personal goodwill in the marital estate.

But Alerding says he knows of no other cases that focus directly on this matter. “So I am not comfortable saying that exclusion of salable personal goodwill is a ‘windfall,’ because, as I said, it is a matter of what the law in a given state is.”

He believes that Dohmeyer’s treatment of the issue may well gain traction with courts, clearing the way for experts to present it in jurisdictions that until now have not focused on it. At the same time, he believes it is important for the expert to educate the attorney about it, prior to going to court, and also to calculate a value that does not include salable personal goodwill in order not to leave the client without a viable alternative opinion.

Alerding also sounds a note of caution about another aspect of the Mauceri case, specifically the statement that the court “discredited the husband’s claim that he could just go across the street and open another agency. He would be competing against himself, which defied logic, the court found.”

It reminded Alerding of a bankruptcy case in which he testified about the value of an insurance agency that resembled the business in Mauceri. “I also included the salable personal goodwill in the agency’s value. The owner of the bankrupt agency had already told the court that he would simply go across the street and set up shop and take the business. It turns out that is exactly what he did and his creditors were unable to realize the value I had placed on the agency.”

Dohmeyer reply: Dohmeyer stands behind the “windfall” argument. “Valuation is about facts and sound economic reasoning,” he replies to Alerding. “I did not ‘convince the court that the salable personal goodwill should be a part of the marital estate.’ In Mauceri, I showed that discounting the stipulated FMV for lack of a noncompete amounted to a discount to the commercial—not personal—goodwill of the business. And the discount would be a windfall to the husband equal to exactly 50% of the difference between the FMV with and without a noncompete (assuming a 50-50 division of assets).”

He continues: “These economic facts, just like the weight of a sack of potatoes, are independent of state borders, laws, and case history. When the opposing expert was confronted with this reasoning, she conceded there would be a windfall and proposed the court allow the discount but then disproportionately divide the remaining marital assets to achieve, in a roundabout way, the hypothetical 50-50 division. Even though I appreciate Jim’s points, the other expert relied on the local folklore and consequently we can see here the importance of understanding the facts and economic substance behind the discount for lack of a noncompete before writing our reports and testifying.”

Image of the United States Supreme Court Building originally published on Wikipedia and taken by Matt H. Wade.