Courts across the U.S. are still struggling to determine and divide goodwill in divorce cases—particularly in those jurisdictions that follow the majority rule and require making a distinction between personal goodwill (nondivisible) and enterprise goodwill (divisible). “Or is it the valuator who is confused?” asked presenters Sharyn Maggio (Maggio & Co.) and Miriam Mason (Mason Black & Caballero) at the recent AICPA/AAML National Conference on Divorce in Las Vegas.

Some appraisers might consider Maggio lucky; she practices in New Jersey, which does not recognize the distinction. “It’s all divisible,” Maggio said, “but I work with one practitioner who insists that with respect to a highly skilled professional, there is no goodwill: It’s all personal.” Other states’ courts have agreed, relying on an inverse argument. For example, in a Missouri decision, the husband claimed he was a key employee in his seven-man roofing business, but the court declined to reduce its value by any personal goodwill, finding the husband didn’t provide the highly skilled professional services that would qualify.

Some courts have determined that all professional goodwill must be salable to be divisible, as evidenced by a noncompete; still others preclude the appraiser from assuming the presence of a noncompete. Notably, in Gaskill v. Robbins (2009), the Kentucky Supreme Court held:

While fair market value of [the wife’s practice] anticipates what a willing buyer would give a willing seller, the fictional sale must be viewed as a "fire sale," meaning that it must be valued in its existing state. This precludes factoring in a nonexistent non-compete clause, as there is no requirement that [the wife] enter into one other than as a possible negotiated term of a real sale.

The Gaskill court also required that any goodwill value “must” have a rational basis in accounting principles and “should avoid speculation and assumptions as much as possible.” This language is a “little disconcerting,” Maggio said. BV appraisers have to make assumptions, particularly regarding goodwill. “But courts don’t like it,” she added, noting that Gaskill is a “must read” case, no matter where you practice. In fact, this year the case came up again after another trip through the courts, and the appeals court affirmed the previous decisions. We've put together the two courts' opinions as well as the respective case digests in a new download; access your copy at BVR's free resources page.