ANOTHER NAIL IN THE GOODWILL COFFIN
February 8, 2011 § 2 Comments
“Goodwill” is the term used in accounting to describe the “prudent value” of a business over and above that attributable to the value of its assets, such as its reputation with customers and the value of its brand. An example would be the value that Coca Cola’s planet-wide brand recognition adds to the company’s value over and above the value of its assets.
Ever since the landmark decision in Singley v. Singley, 846 So.2d 1004 (Miss. 2002), in which the supreme court reversed the court of appeals and held that goodwill is not to be considered in business valuations for divorce, the courts have wrestled with the breadth of that decision. Singley, which involved a dental practice (in Meridian), accurately reflects the way professional practices are valued by valuation experts, who consider that the value of a professional practice depends heavily on the participation in it of its principal, so that it has no goodwill. The question lingered, however, as to how the court would apply the no-goodwill concept in other business valuations.
It is beyond the scope of this post to analyze Singley’s progeny, the most notable of which are Watson v. Watson, 882 So.2d 95 (Miss. 2004), and Yelverton v. Yelverton, 961 So.2d 19 (Miss. 2007). If you’re going to handle any divorce cases involving a busines, you will have to acquaint yourself with those decisions.
This post address the latest pronouncement on goodwill, which comes in the case of Lewis v. Lewis, handed down by the supreme court on February 3, 2011.
Lewis, which was before the court on certiorari from the court of appeals, involved valuation of a business enterprise jointly owned by the divorcing husband and wife to develop residential real estate. The court of appeals had reversed and remanded for the chancellor to correct errors in the valuation of the business. On cert, the supreme court, by Justice Randolph, upheld the court of appeals’ reversal and remand in part, but reversed the court of appeals to add that the trial court was precluded from considering goodwill in its analysis of the valuation.
In a cogent dissent, Justice Kitchens pointed out that Singley and the cases following it had correctly appled the exclusion of goodwill to the professional practices involved in those cases. The business in Lewis, however, was not a professional practice. Kitchens urged the court to recognize that Singley should be limited to solo professional practices or businesses that are closely analogous.
Justice Randolph referred sympathetically to Justice Kitchens’ dissent, pointing out that he had raised similar concerns in his own dissent in Watson to no avail. He pointed out that, if Singley lacked clarity on the point, the court’s decisions in Watson and Yelverton laid aside any doubt, and that goodwill is not to be considered. He went on to say that “Stare decisis demands this result.” Waller, Carlson and Graves joined Randolph in the opinion. Lamar and Chandler concurred. Only Kitchens dissented. Pierce did not participate.
Our appellate courts have not been presented with a business valuation involving nationally or even regionally recognized business entities based in Mississippi on a par with companies such as Viking, or Mississippi Chemical, or Structural Steel or Yates Construction. In such a case, it would be difficult to understand how the court could overlook “enterprise goodwill” as opposed to the “personal goodwill” in the precedent to this point. Yet our case law now is that any form of goodwill is to be ignored in valuing businesses in divorces.