A Tennessee appeals court recently ruled that the trial court hearing in the divorce case of a dentist and his wife must produce a valuation of the dentist's practice "without consideration of professional or enterprise goodwill." What does this mean for business owners in Tennessee who get divorced?
First, you must understand professional and enterprise goodwill. Professional goodwill is the excess of the purchase price of a company over its book value which represents the value of a goodwill as an intangible asset. Enterprise goodwill is derived from the characteristics specific to a particular business, regardless of who owns or operates it.
The trial court heard many disagreements as to the valuation of the dental practice, which was started after the couple was married. There was little dispute as to the value of the real estate where the practice was located -- $180,000. The actual value of the business, however, was heavily disputed.
The trial court accepted the wife's argument that the value of the business was worth a certain amount minus the husband's personal goodwill. This included enterprise goodwill. The wife's expert witness said the value of the business was almost $430,000 because "any dentist could step into [the husband's] practice." The value of the business without enterprise goodwill, according to the expert, as around $210,000.
The court also felt that the husband's valuation of $52,000 was "grossly undervalued." The court assigned a value of $430,000. This was not just because the of the wife's expert witness, but also because the husband had listed a similar value on a loan application a few years earlier.
The husband appealed the ruling. The appeals court found that that the trial court was correct in excluding personal goodwill. The court, however, found that the trial court erred when it included enterprise goodwill in the business valuation.
The appeals court also said that because the husband had a solo practice, the trial court could not include enterprise goodwill in the business valuation. The appeals court remanded the case and ordered the trial court to produce a valuation that had neither professional or enterprise goodwill.
As you can see, a business valuation can be extremely complex in a divorce. Through the use of forensic accountants, financial planners and a divorce attorney, though, the correct valuation may be agreed upon.
Source: Filler & Associates Certified Public Accountants, "Tennessee Appeals Court Straddles Goodwill Issue in Divorce," accessed May 30, 2016