Quantifying Personal Goodwill – Smith v. Smith

October 15, 2006 | Blog, Business Valuation

Icon for author Brian Vertz Brian Vertz

In Smith v. Smith, the Pennsylvania Superior Court ventured into the murky waters of goodwill, an intangible element of business value. Goodwill may be derived from the positive reputation of a business, its location, and its unique products and services. This type of goodwill is generally known as “enterprise goodwill” in divorce parlance. On the other hand, goodwill also may be derived from the personal skills of a business owner or employee – such as a surgeon or accountant. This type of goodwill is generally called “personal goodwill.”

For many years, the divorce courts of Pennsylvania have held that business goodwill constitutes marital property only if it is transferable to a hypothetical buyer. Goodwill which is not transferable – in other words, personal goodwill – is not marital property. Yet, in more than twenty-five years since the Pennsylvania Domestic Relations Code was enacted in 1980, the courts of Pennsylvania have not attempted to isolate and quantify the mixed elements of personal and enterprise goodwill in a single business – until now.

In Smith, the business owner (who was the husband) operated a trucking business based in Blairsville, Pennsylvania. The husband’s business valuation expert chose the net asset value (NAV) method of valuing the trucking business. Wife’s expert, on the other hand, considered the excess earnings method, the discretionary cash flow method, and the capitalized earnings method. In contrast to the nominal value calculated by husband’s expert, wife’s expert found substantial value (which included intangible value in excess of net asset value). The trial court rejected husband’s valuation and accepted wife’s valuation in its equitable distribution decree.

On appeal, husband’s counsel argued that wife’s valuation included personal goodwill, which was not marital property subject to equitable distribution. Judge Orie Melvin for the Superior Court, while opining that “we suspect that much, if not all, of the goodwill was that of the enterprise,” nevertheless remanded to the trial court to quantify the personal and enterprise elements of business goodwill. Seemingly, this decision establishes a precedent that would require valuation experts in divorce cases to isolate and quantify personal and enterprise goodwill in a business where both might be present.

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