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GOOD WILL OF PROFESSIONAL PRACTICES
© 1995 National Legal Research Group, Inc.
MARYLAND: Strauss v. Strauss, 101 Md. App. 490, 647 A.2d 818 (1994).
Reliance on testimony of the wife's expert regarding the value of good will for the husband's oral surgery practice was error, because the expert did not isolate the personal components of the good will value of the practice.
FLORIDA: Weinstock v. Weinstock, 634 So. 2d 775 (Fla. DCA 1994).
Inclusion of good will as a marital asset was improper because the evidence failed to establish a value for the good will apart from the husband's continued presence.
In each of these cases, the wife in a long-term marriage succeeded in convincing the trial court that the husband's professional practice contained a valuable good will component which should be included as marital property. In each case, the good will finding was reversed on appeal.
In both cases, the appeals courts concluded that the wife had not proven what part of the good will was separate from the husband's own reputation. In Strauss v. Strauss, the court remanded for further proceedings on the good will issue, whereas in Weinstock v. Weinstock the appeals court held that good will must be excluded on remand.
Personal good will was not isolated in expert's market data. The wife's expert in Strauss v. Strauss valued the good will of the husband's oral surgery practice at $651,000. He based this figure on market data and hypothetical transactions taken from an annual publication of a Philadelphia health care group entitled The Goodwill Registry. He explained that the Registry defined good will as a combination of intangibles varying on a case-by-case basis as to existence and value. He acknowledged on cross-examination that good will could be separated into the good will of the practice and good will which is personal to the practitioner, but he said he assumed that the market date he used included only the good will accruing to the practice. The husband's expert testified that only the practice's tangible assets should be considered, because the good will in this particular practice was tied up with the husband himself to a highly unusual degree.
Maryland's intermediate appellate court held that it was error to accept the opinion of the wife's expert, and remanded for the trial court to apply a correct methodology in valuing the good will.
The court began its analysis by noting that under Maryland law assets that are "uniquely personal" to the holder cannot, by their very nature, be classified as marital property. This principle was invoked, the court noted, in Prahinski v. Prahinski , 321 Md. 227, 582 A.2d 784 (1990), which held that the good will of a solo law practice is inherently inseverable from the personal reputation of the sole practitioner, so that it cannot be marital property. For other types of practices not subject to the ethical constraints governing law practices, good will can be included in the value of marital property, but only to the extent that the practice has good will separate from the reputation of the spouse, the court continued, citing Hollander v. Hollander , 89 Md. App. 156, 597 A.2d 1012 (1991).
The parties disagreed whether the wife's expert had followed these principles. The appeals court examined his testimony closely and concluded that it was internally inconsistent. First, during direct examination, the expert listed an "individual's name" as being among the factors encompassed in The Goodwill Registry 's definition of "good will." On the other hand, he testified that The Goodwill Registry 's market data on which he based his opinion did not represent personal good will. Thus, he apparently included reputation as part of good will's definition, and then deemed it absent in his computations in which he applied the definition. He conceded to the court that he did not separate the good will value of the husband's practice from the good will attributable solely to the husband's personal reputation, and, in fact, he testified that he knew of no methodology to achieve this objective.
A window into the expert's reasoning and logic, the court said, was his blanket statement that The Goodwill Registry 's appraisal did not include personal good will because "one may assume, as the Courts have assumed, that personal good will cannot be sold [or] transferred." Strauss v. Strauss, supra , 647 A.2d at 827 (quoting testimony of Jon Clark). The court said it could not assume, simply because case law has established a rule mandating the separation of professional and personal good will, that The Goodwill Registry has adopted this dictate in its report of transactions. On the contrary, the court noted, The Goodwill Registry makes no effort to segregate or identify the personal aspects of its good will valuations. Since the wife's expert relied on these values without attempting to isolate any personal components of the good will value of the husband's practice, the foundation of his reasoning and logic was not reliable on its face. When performing a good will valuation analysis, the court said, one should first ascertain whether in the particular case there exists a personal component. If so, one must determine the value of the personal component in the initial computation of good will so that it can subsequently be excluded from the total valuation.
Having found the opinion of the wife's expert flawed, the court reversed and remanded for further proceedings using a legally correct methodology - one that contemplates the value of the husband's professional good will without including the personal good will of his practice.
Comparable sales relied upon by expert did not involve professionals who left the practice immediately after the sale. In Thompson v. Thompson , 576 So. 2d 267 (Fla. 1991), the Florida Supreme Court held that if a professional practice has monetary value beyond its tangible assets which is separate and distinct from the presence and reputation of the individual, then a court should consider the good will accumulated during the marriage as a marital asset. Weinstock v. Weinstock applied Thompson in the context of a dental practice.
The wife's expert was a dentist who had become a consultant for dentists who need an evaluation of a practice for the purpose of sales, purchases, loans, and dissolution proceedings. The expert compared the gross sales of 11 other similar Florida dental practices sold between 1991 and 1992 and opined that the husband's practice, apart from tangible assets and accounts receivable, was worth from $300,000 to $400,000. The trial court accepted the lower figure and used it in valuing the dental practice.
The husband appealed, arguing that the wife's appraiser failed to reduce good will by the Thompson requirement that personal good will be subtracted based upon the reputation and presence of the practitioner. The Florida appeals court agreed with the husband, after concluding with all of the comparables used by the wife's expert that the selling professional remained with the buyer in the conduct of the professional practice for a period of time after the sale. The court noted that Thompson directed the use of the fair market value approach as the exclusive method of measuring the good will of a professional association. The fair market value approach, as adopted in Thompson , separates professional reputation from the remaining elements of good will - such as established patients, good location, and associations because the seller is no longer part of the business, the court noted. "[T]he fair market value does not include the continued presence of the marital litigant or the continuing influence of the personality and reputation of the litigant upon patients after the sale," the court emphasized. Weinstock v. Weinstock, supra , 634 So. 2d at 777.
The wife's expert, the court observed, had testified that in the comparables he used to value the husband's practice, quite often the seller remained with the practice for a year or two after the sale. During cross-examination, he admitted that in all of the comparables the selling dentists continued to practice at the location for some time after the sale. Those comparables could not serve as competent evidence of value in view of Thompson 's requirement that good will, to be a marital asset, must exist separate and apart from the reputation or continued presence of the marital litigant, the court declared.
The court concluded that inclusion of the good will as a marital asset was improper because the evidence failed to establish a value for this good will apart from the husband's continued presence. Because the exclusion of the good will would substantially change the monthly cash flow to the wife and the payments by the husband, the court vacated the entire scheme of alimony and equitable distribution, and remanded for the trial court to fashion new awards.
In a dissenting opinion, one judge said the evidence was sufficient to find the existence and value of good will consistent with Thompson . If the finding of good will was erroneous here, "I question whether such a finding can be sustained in any case involving a sole professional practice." Weinstock v. Weinstock, supra , 634 So. 2d at 778 (Sharp, J., dissenting). The expert's opinion was not based on a requirement that the husband remain with the practice to give it value, the dissent asserted. Based on the expert's testimony, the only essentials were a noncompete and a nonsolicitation agreement, and the necessity for those agreements was not fatal to the conclusion that the dental practice had a good will value, the dissent said.
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