The current majority rule among U.S. jurisdictions holds that the corporate component of the goodwill value of a private professional practice is a divisible marital asset, but the professional component is not. Wisconsin was among the majority until McReath v. McReath, WL 2943198 (Wis. App.)(July 29, 2010), which may have just revised the rule: All salable goodwill is a marital asset and subject to division, whether it is corporate or professional.
But wait a minute: Isn’t the majority rule based on the assumption that professional goodwill is never divisible, because it’s not salable? That’s what the husband in McReath tried to argue, but even he admitted that when he bought his practice from another dentist, the “lion’s share” of the purchase price—as much as 95%—was for professional goodwill, as evidenced by a non-compete. Similarly, if the husband were to sell his practice now, both parties (and their experts) agreed that a non-compete would effectively transfer a substantial portion of the husband’s professional goodwill to a prospective buyer under the fair market value standard.
Accordingly, “there is no serious dispute that a significant, but unspecified, portion of [the $1 million practice value] is attributable to salable professional goodwill,” the court held. Even so, the husband claimed that allocating salable profession goodwill value to the wife coupled with an award of maintenance (based on practice earnings) constituted an unfair double dip. The court saw a problem only if the husband continued to practice. What if he retired or even died after divorce? A rule precluding consideration of salable goodwill would cause the wife to lose her “full” share of the firm’s value—and then lose maintenance, too.
New opportunity for divorce experts? Interestingly, the court proposed an alternative: a trial court could include all salable goodwill in the practice division and then adjust maintenance to avoid a double-counting problem. But in this case neither party had presented expert testimony to explain how to offset business value against the maintenance, and so the court held that all salable goodwill in a private practice is marital property, and any non-salable goodwill, attributable purely to the professional, is not.
The complete digest of McCreath will appear in the next (Oct. 2010) Business Valuation Update™. We’ve also updated one of our most popular downloads, Goodwill Hunting in Divorce, to reflect the new ruling: get your copy here.