Important Utah goodwill ruling concerning one-person business

BVWireIssue #200-1
May 1, 2019

marital dissolution/divorce
enterprise goodwill, expert testimony, net asset value, personal goodwill, discount for lack of marketability (DLOM), sole proprietorship

The Utah Court of Appeals recently examined the nature of goodwill in a one-person business and, in so doing, expanded on the state’s goodwill jurisprudence. The appeals court upheld the trial court’s finding that there was no institutional (enterprise) goodwill in a business that entirely depended on the owner-spouse’s efforts and reputation for competency.

Personal relationships: At issue was the value of a vending machine business that operated throughout Salt Lake City. The husband owned 99% of the business (someone else owned the remaining 1%) and was the only employee. He developed and maintained the relationships with the property owners where the vending machines and kiosks were located. Most of the contracts were month-to-month, making it easy for a property owner to replace one vendor with another.

The company was a marital asset subject to division. But the parties disagreed over the nature of goodwill related to the business. Under Utah law, enterprise goodwill is a marital asset, subject to division, but personal goodwill is not.

The trial court credited the husband’s expert, a CPA and experienced business valuator, who valued the company under the net asset approach and who determined the company had no “institutional goodwill.” The expert noted that, “without the relationships that exist for the places where the vending machines are located, there is no potential for goodwill. There’s no income earning capacity that would be in excess of the value of the assets.”

“[T]he goodwill of [the company] is solely attributable to [the husband’s] work, his efforts, and his reputation for competency,” the trial court said. The goodwill was based on the husband’s “being the face of the business” and his personal relationships with the property owners that allowed him to continue to conduct business on their property on a month-to-month basis.

The wife unsuccessfully challenged this finding in a post-judgment motion and then on appeal. The Court of Appeals agreed with the trial court that the business was essentially a kind of sole proprietorship in which the wife had minimal involvement. The husband was the one who remained in contact with the entities that enabled the business to continue operating, the appeals court noted. While the wife claimed that “anybody could step into [the husband’s] shoes and carry on with the business under its name and with its assets,” she offered no evidence to support this assertion, the court said.

The appeals court found the trial court did not abuse its discretion in finding there was no institutional goodwill to be included in the company’s valuation.

A digest of Marroquin v. Marroquin, 2019 UT App 38 (March 14, 2019), and the court’s opinion will be available soon at BVLawThis case is also now reflected in BVR’s "Charting Goodwill Jurisprudence + Easy Reference Map" (free download).

Hat tip to Daniel Rondeau (Sage Forensic Accounting Inc.) for alerting us to this important decision.

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