'Hill' divorce court confronts problematic excess earnings method and KPMG goodwill testimony

Hill v. Hill, 2014 Tex. App. LEXIS 292 (Jan. 9, 2014)

How do you account for commercial goodwill related to a spouse's partnership interest in a Big Four accounting firm? This was a problem vexing a Texas divorce court seeking to achieve an equitable distribution. Expert testimony proved "vague and conflicting."

The husband was a principal at KPMG, and the wife insisted his partnership interest included considerable commercial goodwill that belonged to the community. Her expert performed what amounted to a calculation of value using the excess earnings method; he computed a $2.4 million fair market value (FMV) for the share. Although the husband's expert recognized there might be commercial goodwill in a professional practice such as KPMG, he claimed "corporate governance" was controlling in valuing the interest. He drew on a partner agreement to conclude that the husband's share was worth no more than $14,100. A Texas trial court dismissed the valuation of the wife's expert as inappropriate for determining FMV. It also held the contract was not controlling but said any commercial goodwill that might exist was unquantifiable or at least inaccessible.

Appraiser Jim Alerding (Alerding Consulting) provides his take on the dilemma facing the experts and the court.

Read more about the decision and subsequent appeal here.