Noncompete-goodwill connection trips up valuators

BVWireIssue #152-2
May 13, 2015

Too many valuators don’t understand the relationship between a noncompete agreement and personal goodwill, and as a consequence they produce problematic appraisals. That’s how Bob Dohmeyer (Dohmeyer Valuation Corp.) sees it. A Texas divorce case in which he served as the wife’s expert illustrates his point.

At issue was an insurance agency that the husband bought during the marriage. Both spouses had the experience necessary to run the business and under Texas law it was community property. The parties stipulated that the agency was worth $292,000 with a noncompete agreement and $141,000 without it.

Windfall: At trial, the husband argued that he should receive the business, but that it should be valued at only $141,000 for purposes of property distribution. The rationale he and his expert offered was that anything above that value was “personal goodwill.” The wife’s attorney and Dohmeyer reminded the court of the parties’ stipulated value, which turned on a covenant not to compete. As Dohmeyer explained, since the agency was valued under the fair market value standard of value, non-saleable personal goodwill was by definition excluded from the value. Moreover, since the business was not going to be sold to a third party but rather would go to the husband, the undiscounted, higher value was applicable. Awarding the husband the business while applying a discount for the lack of a noncompete would be a windfall. The court discredited the husband’s claim that he could just go across the street and open another agency. He would be competing against himself, which defied logic, the court found.

On the stand, Dohmeyer used a hypothetical to further clarify the issue. Assume the husband and wife paid cash for a business that was worth $1 million with a noncompete and $300,000 without the agreement. Two years later, after the noncompete has expired, the husband files for divorce. If the business is performing exactly as it was at the time of the purchase, its worth has not changed. Yet, based on the husband’s logic, one had to assume there was a difference in value and it was attributable to "personal" goodwill.

When the husband’s expert was asked how $700,000 of the $1 million paid in cash would suddenly turn into “personal” goodwill, she did not know but suggested the court could disproportionately divide the remaining assets of the marital estate in order to make up for the discrepancy. The court declined to do so and adopted the $292,000 value.

Takeaway: The wife’s attorney, Casey T. Boyd (The Shapiro Law Firm), says Dohmeyer’s testimony was critical to the favorable outcome in the case. “He conveyed the important concepts to the court in a manner that the court could understand.” Also, his hypothetical “really exposed to the court how inequitable the application of the personal goodwill discount would have been in this context,” Boyd says.

The case is Mauceri v. Mauceri, 199th District Court, Collin County, Texas, No. 199-50537-2013. No appeal has been filed.

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