Value of “Goodwill” Excluded in Law Practice Divorce Valuation

How do you value a small business when one of the partners is getting a divorce?  A shareholder agreement carried the day to reduce the value of a law practice in a court opinion released this week.  The Oklahoma Court of Civil Appeals in Kingery v. Kingery excluded goodwill as an asset to be divided, even though the husband had paid for goodwill when buying into the business.

The husband, attorney K, bought an interest in the WAK&H law firm.  The seller, founding member attorney W, included $200,000 in “practice acquisition” in the sale value.  During the divorce proceedings, the valuation experts hired by both husband and wife considered the “practice acquisition” to represent goodwill value of an existing business.  Husband’s expert witness valued attorney K’s interest in the law firm at either $96,818 or $133,486, depending on whether good will value was included.  Wife’s expert witness agreed with the higher number.  That is the value the trial court adopted.

The Court of Civil Appeals disagreed.  Husband and his partners had a Shareholders’ Agreement.  That agreement included a formula for valuing shares of the corporation.  That formula did not include goodwill value. Husband could only sell his shares to the corporation.  The court assigned a lower value to husband’s interest in the law firm, $98,818, based on the valuation formula of the Shareholders’ Agreement.

The valuation adopted by the appellate court appears to be an adjusted book value.  This type of valuation considers hard assets, such as furnishings, fixtures, and equipment, cash on hand and accounts receivable.  The court noted that husband could only recoup or realize his share of the law firm’s goodwill by continuing to render professional services.  The personal nature of goodwill, coupled with the Shareholders’ Agreement, caused the court on appeal to decide against including goodwill value as part of this marital estate.

The court did not assign a value to more than 400 open contingent fee cases in valuing husband’s law firm.  This is consistent with existing case law.

The appellate court did affirm that salary and bonus paid immediately after the couple separated should be included in the marital estate.  The income represented payment for services rendered while the couple was still a couple.  The appellate court did send this issue back to the trial court to consider further the issue of taxes due on the bonus, and whether the bonus payment should affect the value placed on the business.  In other words, did the salary and bonus payments get counted twice, and does it matter?

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