Opinion ID: 1772317
Heading Depth: 1
Heading Rank: 10

Heading: should good will be used in the evaluation of a sole proprietorship for purposes of equitable distribution?

Text: ¶ 14. Hank next argues that including goodwill in the valuation of a sole proprietorship business used for purposes of equitable distribution during divorce proceeding is not the better reasoned approach and that this Court should address to this issue. Jane responds that the expert who evaluated Hank's dental business was neutral and court-appointed. Jane argues that this Court has previously recognized that it was appropriate to include goodwill in the fair market value of a professional business, although not for the purposes of equitable distribution. The Court of Appeals, however, noted that its holding that goodwill could be used in the valuation of a business when determining equitable distribution in a domestic setting is one of first impression. The Court of Appeals also properly stated: ¶ 21. The issue of whether goodwill is to be used in the valuation of a business for the purpose of determining values for the division of property in divorce cases is a hotly contested issue across the nation. Numerous law journal articles and papers have been written on the subject. And, each jurisdiction having addressed the issue has placed its own unique spin on how goodwill should be treated. Singley, 2000 WL 1287961 at 7-8. ¶ 15. We note that the Court of Appeals is correct that the issue is one of first impression and also correct regarding the disputed holdings of the state jurisdictions across the country. Various jurisdictions have held that goodwill is an aspect of income potential and should be considered marital property used in arriving at a value of a business while other states have held that it should not be considered. In the case sub judice, the court-appointed expert, James Koerber, determined the fair market value of Hank's dental practice using an asset-based approach, which included intangible assets such as good will. Koerber utilized the definition of fair market value taken from a 1959 IRS ruling, as follows: The price at which property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, bother [sic, both] parties having reasonable knowledge of the relevant facts. Koerber valued the cash, accounts receivable, inventory property/equipment, and goodwill which totaled $148,614. Liabilities were fixed at $80,992. Koerber determined that the practice could sell for $145,000. The chancellor accepted this valuation. More revealing here is what did not occur at trial. Hank's expert, Chuck Rae, was not allowed to state his opinion concerning the value of Hank's dental practice and office building. The denial of this testimony is contrary to the intent of Miss. R. Evid. 702. Hank could have even valued his own practice had he so desired. The chancellor should have allowed Rae's testimony, and she was then free to accept or reject that testimony. We find that the chancellor erred in not allowing Rae to give his opinion as to the value of Hank's dental practice. ¶ 16. The issue of goodwill in the context of distribution in a divorce action is indeed one of first impression. Although this Court has previously noted that goodwill was used by an expert appraiser in establishing the fair market value of a professional business, this Court did not specifically address the issue directly or elaborate thereon. The Court simply found no error by the chancellor in accepting the expert's valuation of the business and the case was reversed for other reasons. In re Dissolution of Jackson Arthritis Clinic & Osteoporosis Ctr., 755 So.2d 418, 422 (Miss.2000). However, we note that the case is distinguished from the case at bar as it is instructive only regarding valuation for the purpose of dividing a corporation between two business professionals and not in the context of marital property division in a domestic case. More recently by footnote in Mace v. Mace, 818 So.2d 1130, 1133 n. 3 (Miss. 2002), this Court stated that the opinions of other jurisdictions are split regarding whether goodwill may be considered in valuing a professional practice and, if so, how good will is to be calculated. We also noted that the issue was not before us, thus we declined to address it. Id. at 1136. ¶ 17. We disagree with the Court of Appeals that goodwill may be included in the valuation of a business when the issue of that valuation concerns distribution in a divorce action. We join the jurisdictions that adhere to the principle that goodwill should not be used in determining the fair market value of a business, subject to equitable division in divorce cases. Many other states have previously adopted this rule: Christians v. Christians, 732 So.2d 47 (Fla.Dist.Ct.App.1999) (holding failure to assign goodwill value to business was not erroneous where any goodwill rested solely on husband's well known reputation and abilities and his continued existence and involvement in the business); 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); In re Marriage of Claydon, 306 Ill.App.3d 895, 240 Ill.Dec. 144, 715 N.E.2d 1201 (1999) (noting that professional goodwill is an aspect of income potential and should be reflected in maintenance awards otherwise additional consideration of goodwill is duplicative and improper); Yoon v. Yoon, 711 N.E.2d 1265, 1269 (Ind.1999) (stating that Indiana law adheres to the rule that goodwill based on the personal attributes of the individual is not properly part of the marital estate) [2] ; Powell v. Powell, 231 Kan. 456, 648 P.2d 218 (1982) (goodwill in medical practice is not an asset subject to division in dissolution); Nail v. Nail, 486 S.W.2d 761 (Tex.1972) (goodwill in a doctor's practice is 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); Holbrook v. Holbrook, 103 Wis.2d 327, 309 N.W.2d 343 (1981) (marital estate does not include goodwill of husband's partnership interest in law firm). We conclude that these states have adopted the better view. ¶ 18. The term goodwill as used in determining valuation of a business for equitable distribution in a domestic matter is a rather nebulous term clearly illustrating the difficulty confronting experts in arriving at a fair, proper valuation. Goodwill within a business depends on the continued presence of the particular professional individual as a personal asset and any value that may attach to that business as a result of that person's presence. Thus, it is a value that exceeds the value of the physical building housing the business and the fixtures within the business. It becomes increasingly difficult for experts to place a value on goodwill because it is such a nebulous term subject to change on a moment's notice due to many various factors which may suddenly occur, i.e., a lawsuit filed against the individual or the death and/or serious illness of the individual concerned preventing that person from continuing to participate in the business. It is also difficult to attribute the goodwill of the individual personally to the business. The difficulty is resolved however when we recognize that goodwill is simply not property; thus it cannot be deemed a divisible marital asset in a divorce action. We recognize however that regardless of what method an expert might choose to arrive at the value of a business, the bottom line is one must arrive at the fair market value or that price at which property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts. Consequently, today we join those sister states who prohibit goodwill from inclusion in valuing a business for distribution as marital property in a domestic case. Accordingly, we reverse and render the chancellor as to the inclusion of goodwill in the value of Hank's business.