In Florida divorce, expert’s ‘with-and-without’ valuation withstands appeal

BVWireIssue #202-3
July 24, 2019

marital dissolution/divorce
goodwill, enterprise goodwill, expert testimony, intangible assets, net asset value, personal goodwill, equitable distribution, separate property, marital property

In a nasty Florida divorce case, an appellate court recently upheld the trial court’s valuation findings concerning the husband’s 50% interest in a successful company that operates in the waste disposal industry. The trial court adopted the valuation of the wife’s expert, which included the value of certain intangibles belonging to the company but excluded the value of the husband’s personal goodwill. In Florida, enterprise goodwill is a marital asset, but personal goodwill is not.

Separating out personal goodwill: During the marriage, the husband set up a business, soon selling a 50% ownership interest to a third party. The husband had sole ownership over the remaining 50%. The company facilitated waste removal in that it had relationships with companies that generated waste and those that hauled it away. Apparently, the company did not, itself, remove the waste.

A few years before filing for divorce, the husband sold a 45% interest (nonvoting stock) to a trust but retained a 5% interest that represented 50% of the total voting rights in the company. Ostensibly, he did so for estate planning purposes. But the trial court noted that, at that time, the parties’ marriage was breaking down and that the wife was not properly informed of the sale and its implications.

The trial court first determined that the totality of circumstances suggested the sale “did not serve a valid marital purpose and was unconscionable.” The transaction was the husband’s “unilateral decision” and did not change the classification of the husband’s interest from a marital asset to a nonmarital asset. The value, for purposes of equitable distribution, was the full 50% of the company’s stock (not the retained 5% interest), the trial court decided.

The parties’ experts prepared fair market value determinations but disagreed on how to value the husband’s interest. The husband’s expert proposed a net asset valuation, noting, however, that the company had no significant assets as it didn’t produce anything or own much. According to this expert, all intangible value was linked to the husband’s (and his business partner’s) client relationships and therefore was not a marital asset. This value represented nothing more than the husband’s future earning capacity, which must not be considered in dividing marital property in a divorce proceeding, the expert said.

The wife’s expert valued the company’s assets and teased out the value of all identifiable intangibles which, he explained, belonged to the enterprise (including workforce, trade name, employees’ noncompetes, and customer relations). Proceeding from the premise that a buyer would not buy the company without having a noncompete for the husband in place, which evidences personal goodwill, he used the with-and-without method to determine the value of the husband’s noncompete and subtracted this value from the overall valuation.

In crediting this expert’s testimony, the court emphasized that the valuation did not include any personal goodwill of the husband. The court said it accepted the wife’s expert’s “methodologies for separating out any value related to Husband’s personal goodwill.” A state court of appeal recently affirmed the trial court’s decision per curiam, without issuing an opinion.

A digest of Muszynski v. Muszynski, Case No. 2013-DR-18828-O, Final Judgment of Dissolution of Marriage, Circuit Court of the Ninth Circuit, Orange County, Fla. (Oct. 4, 2017), Bob Leblanc (Circuit Judge), aff’d per curiam Muszynski v. Muszynski, 2019 Fla. App. LEXIS 9913 (June 25, 2019), and the court’s opinion, will soon be available at BVLaw.

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