Valuation analysts who deal with the complexities of personal goodwill in divorce cases and who have not yet downloaded a copy of Walsh v. Walsh should do so now (it’s free, available at BVR). At stake was a family court’s determination that the husband’s share of his law firm was limited to the value established in a partnership share redemption agreement.
The wife’s expert reviewed the husband’s tax returns to determine historical income performance and estimate earning sustainability, and looked at his reputation and client loyalty (customer relationships)1 and using a “capitalization of earnings approach,” valued the husband’s professional practice at nearly 10X the amount specified in the redemption agreement
The appeals court confirmed its belief that future earnings capacity is not goodwill. “However, when that future earning capacity has been enhanced because reputation leads to probable future patronage from existing and potential clients, goodwill may exist and have value.”
By looking at the stock redemption agreement as “just one factor,” the court also looked at other considerations as determinative in examining the existence of goodwill: “the practitioner’s age, health, past earning power, reputation in the community for judgment, skill and knowledge, and his or her comparative professional success.” In so doing, the appeals court reversed the family court with respect to the husband’s personal goodwill.
1 In 2007, the husband considered leaving his firm to join another law firm, and he completed an attorney employment questionnaire which included a list of current clients, all but one of which would follow him to a new firm!