Does personal goodwill attach to a commercial business?

BVWireIssue #79-4
April 22, 2009

The husband in this divorce case owned and operated a small, closely held commercial business. A court-appointed appraiser valued the business at $421,000, based on the excess earnings method. Similarly, the wife’s expert valued the business at $431,000, in large part due to the husband’s integral role in its operations, but attributed its excess value to “corporate goodwill, not personal to the husband.” By contrast, the husband’s expert said the business was worth barely more than $60,000, based on net asset values, and any additional value was due to the husband’s presence and was personal goodwill (non-divisible).

The court faced an interesting question. At trial, the court noted that both the neutral and the wife’s expert valued the company as a going concern, including a portion of “business” goodwill. Only the husband’s expert valued its net assets, and his treatment of goodwill was contrary to state (Arkansas) law, which distinguished personal goodwill only when valuing professional practices. Averaging the values by the neutral and wife’s expert, the court found the business was worth $425,000, and the husband appealed, arguing that it should have deducted personal goodwill when valuing his commercial enterprise. 

In Cummings v. Cummings (Feb. 11, 2009), the Arkansas Court of Appeals rejected this approach. Both the neutral and wife’s expert included goodwill in their appraisals of the business without assigning it any particular value—and the husband failed to ask the trial court for specific findings regarding this fact. Moreover, by deducting personal goodwill, the husband’s expert did not comply with controlling law, which permits such deductions only in cases involving professional practices, “not ordinary commercial enterprises,” the court said.

For a full write-up of the Cummings divorce, see the upcoming May 2009 issue of Business Valuation Update; the complete text of the court’s opinion will be available at BVLaw.

For the most current, comprehensive overview: Check out the new 2009 edition of BVR’s Guide to Personal vs. Enterprise Goodwill. In addition to 130 on-point case abstracts and 200 court opinions contained on a searchable CD, the Guide contains new articles by professional thought leaders Shannon Pratt, Jay Fishman, Kevin Yeanoplos, Mark Dietrich, Jim Alerding, and a host of others. To view more, click here to see the table of contents.

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