Current concepts of goodwill are ‘archaic’ and inconsistent

“The current legal approach to goodwill is archaic,” writes attorney Richard Orsinger(McCurley Orsinger McCurley Nelson & Downing) in a lengthy paper presented at the recent AAML/AICPA National Conference on Divorce in Las Vegas. The legal concept of goodwill arose over 200 years ago, when a business’s income—in excess of its return on tangible assets and labor costs—was attributable to its location, the reputation of its proprietor and products, and the personal relationships between the companies’ owners, employees, and customers.

“Current accounting practices, and the law that applied to goodwill, fail to isolate the earnings attributable to unidentified intangible assets of the business, including the business’s human capital and social capital,” Orsinger writes. “Instead, all unallocated excess earnings are attributable to a residual category called ‘goodwill,’ which offers no aid to those who are tasked with dividing that residual category into subparts.” In other words, business valuators often assume the difficult task of identifying and differentiating between the enterprise goodwill of a marital business and the personal goodwill of the proprietor, frequently “without proper guidance from either accounting principles or the law.”

What are lawyers—and their financial experts—to do? Download Personal vs. Entity Goodwill, a 100-minute webinar on the current state of valuing goodwill in divorce and other scenarios, including valuing noncontrolling interests, covenants not to compete, and the transfer of personal goodwill, featuring Jim Alerding (Alerding Consulting) and Stacy Collins (Financial Research Associates).