Opinion ID: 853862
Heading Depth: 2
Heading Rank: 1

Heading: Goodwill in Valuing a Professional Practice

Text: Goodwill has been described as the value of a business or practice that exceeds the combined value of the net assets used in the business. In re Marriage of Talty, 166 Ill.2d 232, 209 Ill.Dec. 790, 652 N.E.2d 330, 333 (1995) (quoting In re Marriage of White, 151 Ill.App.3d 778, 104 Ill.Dec. 424, 502 N.E.2d 1084 (1986)). Goodwill in a professional practice may be attributable to the business enterprise itself by virtue of its existing arrangements with suppliers, customers or others, and its anticipated future customer base due to factors attributable to the business. It may also be attributable to the individual owner's personal skill, training or reputation. This distinction is sometimes reflected in the use of the term enterprise goodwill, as opposed to personal goodwill. Enterprise goodwill is based on the intangible, but generally marketable, existence in a business of established relations with employees, customers and suppliers. Allen Parkman, The Treatment of Professional Goodwill in Divorce Proceedings, 18 FAM. L.Q. 213, 215 (1984). Factors affecting this goodwill may include a business's location, its name recognition, its business reputation, or a variety of other factors depending on the business. Ultimately these factors must, in one way or another, contribute to the anticipated future profitability of the business. Enterprise goodwill is an asset of the business and accordingly is property that is divisible in a dissolution to the extent that it inheres in the business, independent of any single individual's personal efforts and will outlast any person's involvement in the business. See Talty, 166 Ill.2d 232, 209 Ill.Dec. 790, 652 N.E.2d at 334; 38 AM.JUR.2D Goodwill § 9 (1999). It is not necessarily marketable in the sense that there is a ready and easily priced market for it, but it is in general transferrable to others and has a value to others. Case law from other jurisdictions has recognized enterprise goodwill as a divisible asset. For example, a husband's 50% ownership in a professional corporation which performed medical and laboratory services was divisible as enterprise goodwill where evidence indicate[d] that the patient does not develop a personal relationship with the physician. One seeks out the clinic because of advertising, reputation or referral.... There is no reason to expect that a change in physicians would lead to a significant decline in business as it might in a private practice. Nehorayoff v. Nehorayoff, 108 Misc.2d 311, 437 N.Y.S.2d 584, 591 (N.Y.Sup.Ct.1981). In contrast, the goodwill that depends on the continued presence of a particular individual is a personal asset, and any value that attaches to a business as a result of this personal goodwill represents nothing more than the future earning capacity of the individual and is not divisible. See Bressler v. Bressler, 601 N.E.2d 392, 397 (Ind.Ct. App.1992) (future earnings are not marital property subject to division); see also Martin J. McMahon, Annotation, Divorce and Separation: Goodwill in Medical or Dental Practice as Property Subject to Distribution on Dissolution of Marriage, 76 A.L.R. 4TH 1025, 1044-48 (1990). Professional goodwill as a divisible marital asset has received a variety of treatments in different jurisdictions, some distinguishing divisible enterprise goodwill from nondivisible personal goodwill and some not. Id. (collecting cases). Indiana's dissolution law opts for recognition of this distinction. The General Assembly has determined that the relative earning power of the parties is not a divisible asset because it is not property, but may be considered in determining the percentage of property to be given to each. IND CODE § 31-15-7-5(5) (1998). Accordingly, we join the states that exclude goodwill based on the personal attributes of the individual from the marital estate. See e.g., In re Marriage of Zells, 143 Ill.2d 251, 157 Ill.Dec. 480, 572 N.E.2d 944 (1991) (goodwill in professional practice is not marital property but is an aspect of income potential to be considered in maintenance and support); Powell v. Powell, 231 Kan. 456, 648 P.2d 218 (1982) (goodwill in medical practice is not an asset subject to division in dissolution); Holbrook v. Holbrook, 103 Wis.2d 327, 309 N.W.2d 343 (Ct. App.1981) (marital estate does not include goodwill of husband's partnership interest in law firm); Nail v. Nail, 486 S.W.2d 761 (Tex.1972) (goodwill in a doctor's practice not a divisible asset because it does not possess value or constitute an asset separate and apart from the doctor's person or ability to practice the profession). To the extent that Porter suggests that both personal and enterprise goodwill are to be included in the value of a business or professional practice in a dissolution, it is disapproved. Rather, before including the goodwill of a self-employed business or professional practice in a marital estate, a court must determine that the goodwill is attributable to the business as opposed to the owner as an individual. If attributable to the individual, it is not a divisible asset and is properly considered only as future earning capacity that may affect the relative property division. In this respect, the future earning capacity of a self-employed person (or an owner of a business primarily dependent on the owner's services) is to be treated the same as the future earning capability and reputation of an employee. See Parkman, supra, at 221-22. Some ownership interests in a professional practice are properly viewed as divisible property even if goodwill is a component of their value. Otherwise stated, even a professional practice can have an enterprise goodwill component to its value. Some of the cases following Porter illustrate this point. In Cleary v. Cleary, the Court of Appeals held that goodwill of a medical practice was divisible where the practice had an expectation of continued public patronage based on its exclusive contracts to provide emergency room physicians to two local hospitals. 582 N.E.2d 851, 853 (Ind.Ct.App.1991). The goodwill described in Cleary is enterprise goodwill because the expectation of future patronage is based not on the identity of the physicians but on the exclusive service contracts that were attributes of the business. Similarly, in Berger v. Berger, the Court of Appeals quite properly remanded to determine what percentage of the future amounts to be received for honoring a restrictive covenant was attributable to the goodwill of the husband's dental practice as a commodity sold to the buyer and what percentage was in lieu of future earnings. 648 N.E.2d 378, 384 (Ind.Ct.App.1995). Only the amounts associated with the goodwill of the practice were to be included in the marital estate. Id. at 383-84. Yoon argues that attributing any value to goodwill inevitably triggers a battle of experts over the choice of valuation methods and that the difficulty in predicting the outcome of a valuation dispute substantially increases the time and expense of resolving these issues by agreement or by resort to the court. See Andrew Z. Soshnick, Valuing Business Goodwill in Marital Dissolution Actions: Boldly or Blindly Striving to Grab the Brass Ring from the Blue Sky?, RES GESTAE, July, 1995, at 16. For that reason, Yoon argues, value based on goodwill should be excluded altogether from divisible property. The problem of valuation may be significant, but the argument that the cost of resolving these issues is higher than the benefit of an equitable division of property is for the legislature to resolve. For the reasons given, items fairly described in ordinary parlance as goodwill or clearly so classified as goodwill by an accountant may be valuable assets accumulated during the marriage or they may be reflective only of the reputation or ongoing efforts of an individual. The current statute tells courts to divide the former and permits them to consider the latter in allocating the division between the parties. Hopefully the principles enunciated in this case will help to lend some predictability to future results. In sum, to the extent a business or profession has goodwill (or has a value in excess of its net assets) it is a factual issue to what extent, if any, that goodwill is personal to the owner or employee and to what extent it is enterprise goodwill and therefore divisible property.