Simplified MUM approach weathers attacks in Illinois divorce case

BVWireIssue #196-3
January 23, 2019

marital dissolution/divorce
enterprise goodwill, expert testimony, income approach, personal goodwill, capitalization rate, cash flow, discount for lack of marketability (DLOM), market approach, earnings, noncompete agreement, sole proprietorship, controlling interest

One of the key questions in an Illinois divorce case was how to allocate goodwill between enterprise and personal goodwill. One expert used the “with-and-without” method; the other used the MUM approach in a simplified version. The latter prevailed. Although the appellate court’s opinion is unpublished, valuators should take note because the court’s discussion of the dispute over the validity of MUM reflects an ongoing debate in the valuation community.

At issue was the value of a company offering design assistance and engineering services as well as machining and molding assembly. The husband was the sole shareholder and, by the wife’s admission, the “key guy” at the company. Both sides retained seasoned, credentialed business appraisers who used a similar methodology to value the company, weighting the results of the income and market approach. But the analyses diverged in a number of respects, including the approach for determining the value of goodwill attributable to the husband—a value that was not marital property and therefore excludable from the company’s overall value. 

The wife’s expert used the “with-and-without method,” comparing the company’s projected cash flow over five years under two scenarios: if the husband left the company having signed a noncompete and if he left without signing a noncompete agreement. The expert valued personal goodwill at nearly $1.1 million.

The husband’s expert used the multiattribute utility model (MUM) for which he selected 10 attributes that he scored in a binary manner, i.e., the attribute either existed or did not exist. (The traditional MUM method uses an elaborate scoring system, but the expert used a simplified version.) He determined that two-thirds of the total goodwill value, $2.1 million, represented personal goodwill and one-third was enterprise goodwill.

The wife’s expert acknowledged that MUM was an accepted goodwill allocation method but criticized it for being “subjective” in terms of selecting the attributes and the binary scoring. The “with-and-without” methodology was able to eliminate subjectivity, the wife’s expert said.

The trial court adopted the value determination the husband’s expert proposed, awarding the wife half of it. In appealing the trial court’s valuation decision, the wife attacked the opposing expert’s personal goodwill determination as “far too subjective, and far too suspect, to be accepted by the court.” MUM, the wife argued, allowed for “cherry-picking” and for skewing the results. The appellate court was not persuaded. It found the trial court faced conflicting valuation testimony, considered the weakness in each expert’s opinion, and noted that both goodwill methods were accepted in the profession. Under the applicable standard of review, the appellate court said it was required to give deference to the trial court as fact finder.

A digest of In re Marriage of Preston, 2018 IL App (2d) 170656-U (Aug. 1, 2018), and the court’s opinion are available at BVLaw .

Extra: Goodwill is just one of the many topics on the agenda of the upcoming AAML/BVR National Divorce Conference, which will take place in Las Vegas, May 8-10. In addition, the conference offers attendees a great opportunity to explore a host of other legal and valuation-related topics and interact with peers.

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