post Wednesday January 23, 2013
Goodwill is consistently one of the most complex, and confusing, aspects of accounting, business as a whole and particularly in the context of personal goodwill and intangibles. The recent divorce case of Walsh v. Walsh demonstrates the deep complexities of personal goodwill and how interpretations of its value can vary greatly and require a great deal of care to fully understand the various intricacies.
In the Walsh v. Walshcase, Mr. Walsh was a successful attorney. The value of Mr. Walsh’s share of his law firm had been previously determined by a family court. Following the original assessment of the value of Mr. Walsh’s equity and ownership in his law firm, his wife had her husband’s tax returns reexamined. The result of the expert review of the tax returns was approximately 10 times the size of the agreed upon value that was explicitly addressed in the redemption agreement. The expert looked at Mr. Walsh’s outstanding reputation and the strong customer relationships and loyalty demonstrated by his clients. He applied a “capitalization of earnings approach,” and these methods lead to a dramatically different assessment of the value of Mr. Walsh’s equity in the law firm.
Following the appeal and the subsequent submission of Mrs. Walsh’s expert, the court reviewed the expert opinion compared to the partnership share redemption agreement, and the court reversed the family court in regards to Mr. Walsh’s personal goodwill and the valuation. The court did uphold the precedent that future earnings potential is not goodwill, but they did provide an insightful commentary “However, when that future earning capacity has been enhanced because reputation leads to probable future patronage from existing and potential clients, goodwill may exist and have value.” In addition to evaluating Mr. Walsh’s potential future earnings, the court examined other factors, including his reputation, skills and experience, and relative professional success. All of these factors contribute to a picture of personal goodwill that is filled with many nuances.
In the case of Walsh v. Walsh, the complex nature of goodwill, especially personal goodwill, is on full display. This case should continue to help practitioner’s better value personal goodwill and incorporate various factors into determining the appropriate worth of an individual’s goodwill.
Source:IP Value Wire
Image source: Free Digital Photos
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