WV Looks at Goodwill in Professional Practices
The Supreme Court of West Virginia recently considered the enterprise goodwill of a professional practice in divorce proceedings in Helfer v. Helfer, 221 W.Va. 625, 656 S.E.2d 70 (November 2007).
In Helfer, the business owner’s expert found that his chiropractic practice was worth $41,000, based on a capitalization of earnings. His wife’s expert found the practice to be worth $388,000 based on the excess earnings method. Neither of the experts made a distinction between enterprise goodwill and personal goodwill or placed values on those elements. The trial court adopted the opinion of the business owner’s expert, and the wife appealed, arguing that the trial court failed to consider the value of enterprise goodwill.
I have mentioned before in this blog that the real issue, in matrimonial actions, is whether goodwill is transferrable. Presumably, goodwill emanating from the skills and reputation of a professional is non-transferrable, while goodwill emanating from customer base, trade name recognition, unique goods or services, or other factors indistinguishable from the business itself can be transferred to new owners in a hypothetical or actual sale.
West Virginia, unlike Pennsylvania, has expressly described at least five acceptable methods of valuing a business, two of which are the capitalization of earnings method and the excess earnings method. (The other recognized methods are the Treasury method, the market value approach, and the buy/sell agreement method.) West Virginia precedent requires the court to determine the value of a professional practice and its goodwill if it is determined that distributable goodwill exists.
Since the business owner’s expert, whose opinion was adopted by the court, did not in this case identify the enterprise goodwill, the West Virginia court remanded the case for a determination of the value of enterprise goodwill. The Supreme Court directed the trial court on remand to assign a value of zero to the enterprise goodwill if it found that no enterprise goodwill existed.