1. A Global Reach with a Local Perspective
www.decosimo.com
Professional v. Practice Goodwill
Professional Practice Valuations for Marital Dissolutions
Shannon Farr, CPA·ABV·CFF
Decosimo Advisory Services | 423.756.7100 | ShannonFarr@Decosimo.com
October 19, 2011

2. Today’s Objectives
 Define goodwill, professional/personal goodwill and
practice/enterprise goodwill
 Identify the variety of treatments by state courts
 Discuss precedent-setting cases in Tennessee
 Identify practical solutions to apply in professional
practice valuations

3. Goodwill, defined
 Goodwill—that intangible asset arising as a result of
name, reputation, customer loyalty, location,
products, and similar factors not separately
identified. (SSVS #1 Glossary of Terms)
 As defined by the Indiana Supreme Court (Yoon v.
Yoon):
…the expectation of continued public patronage.
Jay Myoung Yoon v. Sunsook Yoon. Indiana Supreme Court, Cause
No. 49S02-9906-CV-353. Decided June 21, 1999.
711 N.E. 2d 1265; 1999 Ind. LEXIS 402

4. Personal Goodwill, defined
 Business Valuation Resources (BVR):
Personal Goodwill is the goodwill associated with
an individual.
Fishman, Jay. Business Valuation Resources, LLC. BVR’s
Guide to Personal v. Enterprise Goodwill, 2008 ed.; Ch.1.

5. Personal Goodwill, defined
 ―Personal goodwill is a personal asset that depends
on the continued presence of a particular individual
and may be attributed to the individual owner’s
personal skill, training or reputation.‖ (Supreme
Court of Appeals of West Virginia, May v. May, (No.
31123))

6. Elements of Personal Goodwill
 The professional’s expertise and/or specialized skills
 The professional’s knowledge
 The professional’s relationships
 The professional’s reputation
 The professional’s personality (charisma)
Fishman, Jay. Business Valuation Resources, LLC. BVR’s
Guide to Personal v. Enterprise Goodwill, 2008 ed.; Ch.1.

7. Enterprise Goodwill
 Business Valuation Resources (BVR):
Enterprise Goodwill is the goodwill associated with
the enterprise or institution.

8. Enterprise Goodwill, defined
 ―Enterprise goodwill is an asset of the business and
may be attributed to a business by virtue of its
existing arrangements with suppliers, customers or
others, and its anticipated future customer base due
to factors attributable to the business.‖ (Supreme
Court of Appeals of West Virginia, May v. May, (No.
31123))

9. Elements of Enterprise Goodwill
 The business’s location(s)
 The business’s staff/employees
 The business’s operating procedures/protocol
 The business’s reputation
 The business’s name, logo, website, phone number
(branding)
Fishman, Jay. Business Valuation Resources, LLC. BVR’s
Guide to Personal v. Enterprise Goodwill, 2008 ed.; Ch.1.

10. Dr. Shannon Pratt
 Understanding the Difference Between Personal and
Enterprise Goodwill is Vital to the Identification of
Marital Assets
…the separation of personal versus enterprise
goodwill depends on whether (or the extent to
which) the customer returns because of the
individual, or because of an element or elements
that belong to the enterprise.
Pratt, Shannon P. Business Valuation Resources, LLC. BVR’s
Guide to Personal v. Enterprise Goodwill, 2008 ed.; Ch.1.

11. Characteristics of a Professional Practice
 Primarily a service business with fewer tangible assets than
most small businesses.
 A relationship of trust and respect exists between the client and
the professionals or employees of the practice. This is because
the client must rely on professional expertise that the client is
not fully capable of understanding or evaluating.
 The practice or the practitioner often relies on referrals.
 A specific college or graduate degree is usually required by
regulatory bodies for the professional to practice in the chosen
field.
 The practitioner is licensed by a governmental or regulatory
agency and/or certified by a recognized professional
organization.
Source: Valuing Small Businesses and Professional Practices,
Pratt, Reilly and Schweihs, pp. 560 - 561

12. Standards of Value
 Fair Market Value
 Fair Value (for shareholder dissent and oppression
cases)
 Fair Value for Financial Reporting
 Investment Value

13. Fair Market Value
 Fair Market Value—the price, expressed in terms of
cash equivalents, at which property would change
hands between a hypothetical willing and able buyer
and a hypothetical willing and able seller, acting at
arms length in an open and unrestricted market,
when neither is under compulsion to buy or sell and
when both have reasonable knowledge of the
relevant facts.(SSVS #1 Glossary of International
Business Terms)

14. Fair Value
 For state legal matters only, some states have laws
that use the term fair value in shareholder and
partner matters. For state legal matters only,
therefore, the term may be defined by statute or case
law in the particular jurisdiction.
 In this context, fair value typically excludes
consideration of minority interest discounts
 For financial reporting: the price that would be
received to sell an asset or paid to transfer a liability
in an orderly transaction between market
participants at the measurement date.

15. Investment Value
 Investment value - the value to a particular investor
based on individual investment requirements and
expectations. (SSVS #1, Glossary of International
Business Terms)

16. Goodwill as a Marital Asset
 In the event of a marital dissolution it may be
necessary for the court to:
 First distinguish between personal and enterprise
goodwill and, then,
 Decide which type of goodwill is a marital or
distributable asset.
A number of courts, but not a majority, make no distinction between personal and enterprise
goodwill. These jurisdictions have taken the position that both personal and enterprise goodwill in
a professional practice constitute marital property. A minority of courts have taken the position that
neither personal nor enterprise goodwill in a professional practice constitutes marital property. The
majority of states differentiate between enterprise goodwill and personal goodwill. Courts in these
states take the position that personal goodwill is not marital property, but that enterprise goodwill is
marital property.
Gordon, Noah J. Business Valuation Resources, LLC. BVR’s
Guide to Personal v. Enterprise Goodwill: Goodwill Valuation
in the Courts, 2008 ed.; Ch.2.

17. Majority Rules
 The majority of states, but not all, have precedent-
setting cases establishing enterprise goodwill
attributable to the business itself as a marital asset,
and personal goodwill intrinsically tied to the
attributes and skills of an individual, as not marital.

18. The Concept of Transferability
 The concept of transferability is closely linked to
distinguishing between professional and enterprise
goodwill

19. Does Size Matter?
 As a business increases in size and complexity, its
goodwill transitions from primarily personal to
enterprise

20. Tennessee Court Decision Continuum
Neither Personal nor Enterprise Goodwill is a
Enterprise Goodwill is Marital Asset, Personal
Considered a Marital Asset Goodwill is Not
Smith v. Smith, Witt v. Witt,
709 S.W.2d 588 No. 01-A-019110CH00360, 1992 WL 52746
(Tennessee Court of Appeals, 1985) (Tennessee Court of Appeals, 1992)
York v. York,
Hazard v. Hazard, No. 01-A-01-9104-CV-00131, 1992 WL 181710
833 S.W.2d 911 (Tennessee Court of Appeals, 1992)
Tennessee Court of Appeals, 1991
McKee v. McKee,
No. M2009-01502-COA-R3-CV
(Tennessee Court of Appeals, 2010)

21. Smith v. Smith (TN Court of Appeals)
 The wife appealed the Trial Judge’s treatment of the
husband’s law practice as a nonmarital asset.
 The Tennessee Court of Appeals stated as follows:
―We are not persuaded, however, that this state should adopt the
rule that professional goodwill is a part of the marital estate. We find
the position taken by the Wisconsin Court of Appeals in Holbrook v.
Holbrook, 103 Wis. 2d 327, 309 N.W.2d 343 (1981) to be persuasive.‖
Smith v. Smith, 709 S.W.2d 588
Tennessee Court of Appeals, 1985.

22. The Concept of ―Double-dipping‖
 In Holbrook v. Holbrook, the (Wisconsin) Court said:
The concept of professional goodwill evanesces when one
attempts to distinguish it from future earnings
capacity. Although a professional business’s reputation,
which is essentially what its goodwill consists of, is
certainly a thing of value, we do not believe that it bestows
on those who have an ownership interest in the business,
an actual, separate property interest. The reputation of a
law firm or some other professional business is valuable to
its individual owners to the extent that it assures
continued substantial earnings in the future. It cannot
be separately sold or pledged by the individual owners.
The goodwill or reputation of such a business accrues to
the benefit of the owners only through increased salary.

23. McKee v. McKee (TN Court of Appeals)
 The wife (a pediatric dentist) owned a one-third interest in
the dental practice of which she was a partner.
 The two experts testifying at trial agreed that it was
inappropriate to consider personal goodwill in valuing a
business for divorce purposes, but they differed in their
categorization of patient files. The wife’s expert testified
that no value should be attributed to the patient records
in the context of the divorce proceeding because it
equates to personal goodwill.
 Key points of his testimony included:
 Patient records are not capable of earning money “without
a professional providing the service,” and
 The presence of the restrictive covenant in the wife’s
partnership agreement was “proof” of the existence of
personal goodwill
McKee v. McKee, No. M2009-01502-COA-R3-CV
(Tennessee Court of Appeals, 2010)

24. Witt v. Witt (TN Court of Appeals)
 The Husband was the chief of radiological services
at a hospital and also operated a diagnostic clinic
with eight technicians that provided services to
referring physicians.
 The Court approved the trial court’s finding that the
value of the husband’s medical practice
substantially exceeded the net asset value even if
the husband’s professional goodwill were excluded.
Witt v. Witt, No. 01-A-019110CH00360, 1992 WL 52746
Tennessee Court of Appeals, 1992.

25. York v. York (TN 1992)
 Although husband originally had a solo surgical practice,
at the time of divorce he owned 85% of an incorporated
multi-specialty medical group employing 11 physicians,
10 nurses, a psychologist and an optometrist. The
company also owned an office building housing
physician offices, an ambulatory clinic, an optical store,
and space for an endoscopy clinic.
 Husband ―insisted‖ that any valuation of the company
should, as a matter of law, not include business goodwill
(citing Smith).
 However, the appeals court ruled that Smith’s ―net asset
value principles‖ did not apply to incorporated
professional practices that do not depend solely on the
professional reputation of the practitioner (citing Witt).

26. Company/Practice Analysis
 How is revenue generated? From the owner-
professional’s efforts only? Or from employee-
professionals efforts as well?
 How many employees does the practice have? What
are their functions? Do they have credentials/
certifications? Are they ―highly trained‖?
 How are the facilities contributing to patronage? Is
location a factor?
 What equipment is in place? Is equipment integral to
the services provided?
 How does the entity compare to other entities within
the same professional (smaller, larger, etc.)?

27. The Asset Approach
 Asset approach – typically excludes all intangible
assets, including goodwill (whether personal or
enterprise)
 Likely the best approach for valuing professional practices
similar to that in Smith
 Can be used in conjunction with determinations of the value
of enterprise goodwill components such as a trained and
assembled workforce

28. The Market Approach: An ―Unwilling‖
Seller?
 Many courts have considered the ―unwilling‖ seller
issue. This concept is sometimes referred to as
―value to the holder.‖ Quite simply, these courts
have considered the fact that the owner-professional
spouse is not a ―willing seller‖ as contemplated by
the definition of fair market value.
 A covenant not-to-compete is an essential element in
this consideration
 In these jurisdictions, the M&A method results likely
will not apply/be considered

29. ―For Purposes of Marital Dissolution‖
 Although the valuation analyst may or may not be
asked to assist in the determination of child support
or alimony, the basis of these determinations is the
parties’ (presumably ongoing) current income.
 If the income used in the support determinations is
generated by a spouse’s professional practice, it is
conceptually unreasonable to assume that the
professional is ―willing‖ to sell his/her practice.

30. The Income Approach
 Often an option to value a professional practice
with enterprise characteristics
 The discount rate/capitalization rate can be adjusted to
consider key man factors
 The excess earnings method could be used to determine the
value apart from personal goodwill
 If cash flows from ancillary services (services provided
without the direct effort of the professional) can be isolated,
these income streams can be capitalized

31. Resources
 ―Goodwill Hunting in Divorce‖ free download
available at www.bvresources.com
 Valuing Small Businesses and Professional
Practices, Pratt, Reilly and Schweihs
 BVR’s Guide to Personal and Professional Goodwill
 Smith v Smith, 709 S.W.2d 558 (Tenn. App. 1985)
 McKee v McKee, No. M2009-01502-COA-R3-CV
(Tenn. Ct. App., Aug. 17, 2010)
 Witt v. Witt, No. 01-A-019110CH00360, 1992 WL 52746
(Tenn. Ct. App., Mar. 20, 1992)
 York v York, No. 01-A-01-9104-CV-00131, 1992 WL
181710 (Tenn. Ct. App., Jul. 31, 1992)

32. CONTACT SHANNON FARR
Shannon Farr
ShannonFarr@decosimo.com
423-756-7100
DISCLAIMER: The contents and opinions contained in this presentation are for informational purposes
only. The information is not intended to be a substitute for professional accounting counsel. Always seek
the advice of your accountant or other financial planner with any questions you may have regarding your
financial goals.