Valuing Two Kinds of Goodwill
What is goodwill?
Goodwill represents significant value in saleable businesses today. The following is the condensed definition. Many books are dedicated to understanding, measuring, and valuing goodwill. Obviously, it is complex.
Goodwill: Assumed value of the attractive force that generates sales revenue in a business, and adds value to its assets. Goodwill is an intangible but saleable asset, almost indestructible except by indiscretion (the loss of trust in the brand).
It is built painstakingly over the years generally with
(1) heavy and continuous expenditure in promotion, (financial and talent)
(2) creation and maintenance of durable customer and supplier relationships,
(3) high quality of goods and services, (that exceed customer expectations)
(4) high quality and conduct of management and employees. (And others supporting the company's operations)
Goodwill includes the worth of corporate identity (branding), and is enhanced by corporate image and a proper location. Its value is not recognized in account books but is realized when the business is sold, and is reflected in the firm's selling price by the amount in excess over the firm's (tangible and identified intangible values) net worth. Source: Business Dictionary; CBA's limited comments are in parentheses.
Specializing in the valuation of professional and technology firms.
Service firms are growing in numbers, size, and specialization. We understand how their uniqueness is valued in the buyer's market. Some of the most successful firms sell products, but the service to customers is what makes them profitable. Amazon is a top example.
The primary focus is on valuing the firm's intellectual property and intangible assets including goodwill, since tangible assets are easier to list and value.
A recently published analysis of the sales of service businesses showed:
91% to 100% of the company's value was goodwill for 30% of those sold
40% to 100% of the company's value was goodwill for over 80% of those sold
This makes identifying and accurately valuing intangible assets and goodwill critically important. See The Questions Unasked, and The Rest of the Story see the linked page.
You are welcome to ask anything. Call (513) 266-3226 Today
Here are some topics and articles available:
- In a Divorce, You Need Good Answers for 10 Top Questions
- Two Kinds of Goodwill: Professional v. Enterprise
- Why Are Intangible Assets And Intellectual Property So Important Today?
- Why Is Double Dipping into Future Earnings Controversial in a divorce?
- Why does your divorce court location force important valuation choices?
Intangible assets by definition do not have physical properties. The first valuation hurtle is their identification. You must identify the associated characteristics present before you can value them. Our research and valuation experience has identified over 129 intangible assets and multiple kinds and categories of goodwill.
Common sense would suggest that the client characteristics found in a practice are key to valuing a practice. The value driving characteristics of clients are unique and dependent on the type of professional practice. Experience in valuing the types and components of intangible assets and goodwill allows us to know which questions to ask for a physician's practice verses an advertising agency or an attorney's practice.
For some divorce valuations, the valuator may need to value the two types of goodwill separately. Since many, if not most, valuations have not distinguished between the two types; you will find a variety of opinions on when, how and what to measure.
You'll discover that there are three (3) positions commonly taken concerning goodwill in divorce cases.
- No goodwill is a marital asset
- Only one type of goodwill is a marital asset
- All goodwill is a marital asset
Business Valuation Expert Cincinnati, Columbus, Dayton, Hamilton, and Lebanon Ohio
In Ohio, as in many other states, the latitude of the trier of fact and mediators has given inconsistent and inconclusive results regarding how to treat goodwill. If the valuator does not separately identify and value the two types of goodwill (professional or personal and enterprise/commercial), then these decision-makers cannot consider the components of goodwill. The result has often been to lump all goodwill into one value.
Presenting the valuation of both types of goodwill will help in the equitable division of assets. What will happen if the valuator has available ample reliable and technique specific data to establish the separate values for goodwill? How would the parties react to the separate values of goodwill developed using well-researched and generally accepted valuation principles? For example, how might you argue the perception of "double dipping" on future income?
February 1, 2003 things changed for legal practices
Ohio and attorneys in many other states can now sell their practices. Now is the time to find smart and effective ways to build and protect your most valuable asset - your practice.
Law practices have unique and very specific value drivers. You will find that we can give you the operating risks and best practices benchmarks to measure a practice's worth.
You can find out more about business valuation services by calling (513) 266-3226 or by clicking on the "Contact" button at the upper right or the "information request" under "Other Resources" at the left bottom on the Home Page.
Goodwill: Professional or Enterprise
Two Kinds of Goodwill: Professional v. Enterprise
Documenting the characteristics of "enterprise, practice, or commercial goodwill" and "professional or personal" to separately value (bifurcate) each is a unique area of valuation expertise for David A. Dinsmore, BCBA.
Controversial Attitude for Double Dipping into Future Earnings by Including
- Professional/Personal Goodwill in Business or Practice Value
Goodwill is an intangible asset. Goodwill is a fragile and withering asset that can be lost over night. Goodwill is justified by profits or financial benefits and is not repayment for start-up or other costs. Individually identified intangible assets can have value independent of the company and its associated earnings.
Goodwill is a confirmation and measurement of earning power and the preparedness to be sold, and not the potential for either. Goodwill exists when the company's earnings significantly exceed the sum of a sensible rate of return on assets and a single working owner's total pay. If this was not the case, a prudent individual would get a job and invest elsewhere. The seller must show proof of goodwill that the buyer can trust.
Other tests are used to validate and measure any "enterprise or commercial goodwill" tied to the company and "professional or personal goodwill" linked to a person to include in the valuation. Since tangible assets may be valued fairly easily, the company's value of "intangible assets" or the "established book of business" is central to an appraisal.
Your benefit of the exercise depends on your state's position on the separation of goodwill and for many the individual court's judge or magistrate. It is the responsibility of counsel as the client's advocate to instruct the valuator concerning their argument for any litigation.
Characterize Personal Goodwill as Marital Property
13 States: Arizona, California, Colorado, Kentucky, Michigan, Montana, Nevada, New Jersey, New Mexico, New York, North Carolina, North Dakota, and Washington
Subject to Change
Characterize Personal Goodwill as not Marital Property
28 States: Alaska, Arkansas, Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Kansas, Louisiana, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Nebraska, New Hampshire, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Virginia, Wisconsin, and Wyoming
Subject to Change
No Decision States
9 States: Alabama, Georgia, Idaho, Iowa, Maine, Ohio, South Dakota, Vermont and West Virginia; Subject to Change
Federal courts, individual states, and local jurisdictions passionately argue goodwill*s status as marital or separate property in divorce dealings. The debate has created several conflicting goodwill policies. Supreme Court rulings and state statutes in Ohio have not set how to treat goodwill in divorce proceedings. Ohio attorneys might find a substantial financial advantage for their clients by using arguments to divide goodwill into enterprise/commercial goodwill and professional/personal goodwill.
Consider the following perspective posed by a valuator who specializes in business valuation litigation and divorce support in Ohio:
In the October 9, the summary of Clymer v. Clymer (2000 Ohio Lawyers Weekly No. 110-419-00).
"While the contentions of the case seemed to deal with the methodology of calculating practice/business goodwill, as opposed to specific arguments over personal professional goodwill, I found the outcome to be very telling. The trial court judge found that the proper use of the "capitalization of excess earnings method" was an acceptable method for determining the amount of, or lack of, professional goodwill to be allocated directly to the business entity. In this case, the capitalization of excess earnings method, based upon four years of actual earnings history, indicated there was no goodwill associated with the law practice. The final value, with practice/business goodwill calculated to be zero, amounted to $65,471 which was only the value of the net tangible assets."
However, the wife's Columbus attorney said he found it "interesting" that the husband's expert found no goodwill value in the firm when, 30 days after the appraisal date, the husband signed a mutual buy-out agreement with a price of around $900,000.
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Divorce process company's value is independent of professional's future earnings?
"Double Dipping" or " Double Counting Earnings/Income" is where the same defined " income stream" (compensation, income or earnings) is used in both the calculation for a business valuation and the spousal support calculation. Divorce being the primary situation this happens. There is a flaw in the business valuation process of defining the income streams for each calculation that has been historically over looked by those inexperienced in divorce valuations.
Foundation Concepts. A business valuation translates an amount of annual income or financial benefit stream into a present value at a specific point in time. At that point in time the income becomes only a present value and it has no component of future income. At that same point in time the business is a single asset and valued as such for your report's conclusion of value.
Just as you would pay $1,000 for a CD, the income does not start until you have given up possession of the $1,000 to the bank. The business or other investment is either an asset or an income stream, not both at the same time.
This approach seems to be consistent with Ohio to "first divide the assets then consider the incomes that each party has after the division of assets." The firm's value conclusion approach is believed to be consistent and compatible with the understanding of Ohio's calculations for alimony/support using actual compensationamounts at a specific point in time.
The "double dipping" problem is created when the owner's compensation in the company's profits for the business valuation and the owner's compensation for spousal support are considered to be the same or equal in a valuation methodology that must differentiate between the two.
For some valuation methods the income amounts rarely are equal because the appropriate" owner compensation" for the valuation should be adjusted (normalized or recast in valuation terminology) to the Fair Market Value, FMV for the job's position, duties, and time and the actual"owner compensation" are almost always different- either higher or lower. It is the dollar differential of the two "owner compensation" amounts, commonly not considered by some appraisers, that I determine in the "double dipping" analysis and value calculation.
Please call if you have concerns about double dipping or other inequities in your valuation project. A detailed set of examples are available for active clients.