A divorce expert’s failure to link the facts related to a successful insurance company to his personal goodwill analysis was one of the reasons a Florida appeals court recently overturned the trial court’s valuation findings, which, the reviewing court said, were not based on competent, substantial evidence.
Principal revenue generator: During the marriage, the former spouses bought an insurance agency from the husband’s parents. The husband served as the company’s CEO, managed all aspects of the business, and was the largest generator of revenue. The wife worked as the agency’s bookkeeper.
The husband and wife initially paid $1.5 million for the business and also assumed the significant outstanding corporate debt. During the marriage, the business’s gross revenue nearly doubled. During divorce proceedings, the former spouses, relying on expert testimony, disagreed on the agency’s fair market value, the value of goodwill attributable to the husband, and the income available for alimony.
As for personal goodwill, under Florida case law, it is not a marital asset and excludable from the value of assets available for equitable distribution. Here, the husband’s expert analyzed the agency’s revenues and how much each employee generated for the business. He also considered how much business the husband could take with him if the agency were sold and the husband were not subject to a noncompete agreement. Based on this analysis, the expert concluded the value of personal goodwill in the company was about $1.6 million, which was 68% of the company’s fair market value (almost $2.1 million).
In contrast, the wife’s expert considered 30 transactions of insurance companies from the DealStats database. The transactions were not limited to Florida, and a few went back to 1997. Some of the transactions reported the value of a noncompete agreement—most assigned a value of less than 10%. The expert found the average of those values was 7.3% and used that figure to value the husband’s personal goodwill.
The trial court adopted the 7.3% value the wife’s expert proposed. The appeals court reversed, noting the expert “did not provide any specific knowledge about the particulars of the insurance businesses that reported transactions in the DealStats database.” The court said the expert did not disclose how involved the owners of the businesses he considered were in the company’s affairs, whether they sold insurance, as the husband here did, what the day-to-day operations were. The court also found it problematic that some of the analyzed transactions took place outside Florida and some were almost 20 years old. Importantly, the court pointed out that the husband here was the CEO of the company, was involved in all aspects of the company, and was its largest generator of revenue.
The testimony of the wife’s expert was not competent evidence to support the trial court’s personal goodwill value, the appeals court found. It overturned on this and other valuation issues.
A digest of King v. King, 2021 Fla. App. LEXIS 3170, 2021 WL 822476 (March 4, 2021), and the court’s opinion will be available soon at BVLaw.
Extra: Last week’s coverage of the Columbia Pipeline case, in which the Delaware Court of Chancery recently ruled in the now active breach of fiduciary duty action, omitted the case citation. The citation is: In re Columbia Pipeline Grp., Inc., 2021 Del. Ch. LEXIS 39, 2021 WL 772562 (March 1, 2021). The online version of the article now includes the citation.