How To Value A Professional Practice In Divorce
When a person owning a small professional practice (Dentist, Doctor, Lawyer, Psychologist, etc.) becomes involved in a divorce proceeding, the value of their professional practice, which has been providing income to the family during the marriage, often becomes an issues in asset division.
Much of the value of a small professional practice derives from what is known as “goodwill”. In 1989 the South Carolina Supreme Court adopted a common definition of goodwill to guide the courts in valuing professional practices in divorce:
Goodwill may be properly enough described to be the advantage or benefit which is acquired by an establishment beyond the mere value of the capital, stock, funds, or property employed therein, in consequence of the general public patronage and encouragement which it receives from constant or habitual customers, on account of its local position or common celebrity, or reputation for skill or affluence, or punctuality, or from other accidental circumstances or necessities, or even from ancient partialities or prejudices.
It attaches to the person of the professional man or woman as a result of confidence in his or her skill and ability. [cite omitted] It does not possess value or constitute an asset separate and apart from the professional’s person, or from his individual ability to practice his profession. It would be extinguished in the event of the professional’s death, retirement or disablement. [cite omitted]
Donahue v. Donahue, 299 S.C. 353, 359, 384 S.E.2d 741, 745 (1989)
Courts in other jurisdiction have attempted to further define goodwill by finding that it can be “subdivided” into enterprise (or “business good will”) goodwill and personal (also known as “professional goodwill”). Enterprise goodwill is derived from characteristics specific to a particular business, regardless of who owns or operates it. Personal goodwill attaches to a particular individual rather than to the business that the individual owns.
This issue was addressed about 5 years ago by the South Carolina Supreme Court in Dickert v. Dickert, 387 S.C. 1, 7, 691 S.E.2d 448, 451 (2010). Dr. Dickert owned a small dental practice and was married to his Wife for 29 years. Wife was a traditional stay at home mom and Dr. Dickert provided all of the financial support for the family during the marriage. At trial, Wife’s expert testified that Husband’s dental practice was valued at $360,000 and that $256,517 was “enterprise goodwill” and therefore should be included in the overall valuation of the marital estate for asset division purposes. The trial court agreed with Wife and her expert and included $256,517 in the valuation of the marital estate.
The South Carolina Supreme Court reversed the trial court and found that “because of the intangible nature of the goodwill asset, “enterprise goodwill” in a professional practice is not subject to equitable distribution”. Dickert v. Dickert, 387 S.C. 1, 7, 691 S.E.2d 448, 451 (2010). The Court ordered that the trial court to re-divide the parties marital estate without the inclusion of the value of Husband’s dental practice.
It is clear then that under no circumstances, at least as of the date of this post, will our courts permit any definition of “goodwill” to be included in the value a professional practice for asset division purposes. The only proper consideration of a small professional practice like Dr. Dickert’s is for a determination of income for child and spousal support purposes.
In Mr. Dickert’s case, the Supreme Court reduced the trial court award of $8,600 per month in permanent periodic alimony to $7,000- but that’s a topic for another post!