More Personal Goodwill – Baker

October 20, 2006 | Business Valuation, Court Decisions, Divorce, Legal Perspective

Icon for author Brian Vertz Brian Vertz

In Baker v. Baker (2004), a predecessor to the Smith case reported previously in this blog, the Superior Court considered the intangible goodwill value of a veterinary practice located in rural Lycoming County. The husband, who was a sole practitioner, had purchased the practice of a deceased veterinarian for $250,000 (including real estate worth $90,000) approximately six months prior to the separation of husband and wife. Aside from $10,000 withdrawn by the husband from his marital retirement accounts, his purchase was entirely financed by loans.

In the Lycoming County divorce proceeding, the veterinarian’s wife offered the report and testimony of her valuation professional, David G. Bohlander of Analytics, Inc., regarding the value of the husband’s veterinary practice. Mr. Bohlander determined the value of the practice as of year-end 2002, two years after the date of separation. Husband offered no expert of his own.

The trial court accepted the opinion of wife’s expert that the equity in Husband’s veterinary practice, including enterprise goodwill, was $99,000. The briefs reveal that the wife’s expert used a discretionary cash flow method as well as a price-revenue multiple to determine the value of the practice. The discretionary cash flow multiple calculated by the wife’s expert was 2.84, which was multiplied by the discretionary cash flow of the previous owner, the deceased veterinarian. The indicated value under this method was $190,000.

Applying the price-revenue method, the wife’s expert multiplied a 0.63 ratio times the projected revenue of the practice in the hands of the new owner, the husband, to arrive at an indicated value of $115,000. Averaging the two methods, the expert expressed an opinion of value of $152,937 for the intangible value of the veterinary practice, which included its name recognition, customer lists and location.

On appeal, Husband argued that the trial court had erred in finding any value which might be attributable to enterprise goodwill. After all, unlike the Fexa case on which the wife’s expert had relied, husband’s professional practice did not employ multiple professionals or experience personnel changes over several decades. Dr. Baker’s veterinary practice was a sole practice more akin to the sole proprietorship in the Solomon case. Husband asked the Superior Court to interpret Solomon as holding that sole professional practices per se lacked any enterprise goodwill value.

Husband also argued that a substantial portion of the equity found by wife’s expert could be traced to the post-separation paydown of the loans by which the practice and real estate were acquired. Husband had paid down the loans by more than $20,000 from the date of separation to the date of the valuation.

The trial court’s decision was affirmed on appeal to the Superior Court.

Clearly, in ruling in favor of the wife, the Superior Court held that a business does not lack enterprise goodwill merely because it is a sole proprietorship. In this case, the fact that the husband had paid substantial consideration to purchase the practice was perhaps critical to the trial court’s decision.

Perhaps just as important, however, is the fact that the husband did not hire his own expert to quantify the personal and enterprise elements of goodwill. The Superior Court cited Litmans, in which the court had resigned itself to accepting uncontradicted evidence of value where no better evidence had been offered. The trial court in this case was faced with a troubling choice: to reject the opinion of wife’s expert and assign no value to the husband’s business, or to accept the report which merely proved the value of husband’s business fully two years after the date of separation. The latter, apparently, was the lesser of two evils.

The lesson: when representing a professional in a sole practice, do not neglect to hire a valuation expert while assuming that the trial court will not assign intangible value to the practice.

Contact Us