IN DIVORCE SITUATIONS
"The value a willing buyer and a willing seller are willing to agree to" is the most commonly accepted practical definition of value that I am aware of. When both parties want a deal to take place, valuation is generally not a problem. There is usually some simple math, maybe a little minor skirmishing, but things pretty much fall together.
Such is not the case, however, if one party (or both) proves to be "unwilling", as often happens in divorce situations involving small businesses. Economic and other circumstances generally require one party (most likely the husband) to buy and the other party (most likely the wife) to sell, and an agreeable price is simply not possible. The situation is often further complicated by personal factors totally unrelated to objective valuation.
The so called "hard assets" - cash, receivables, inventory, equipment, etc. are typically not very difficult. Their values are usually easy to determine and little argued about. The same is true with liabilities. The real contention ordinarily centers around "goodwill". The "seller" often sees a very large number, and the "buyer" a very small number, or no number at all.
It is very tempting for one party (or both), acting through his or her attorney, to hire agreeable "experts" to say what they want to hear. There is a real risk to such behavior, however. Judges tend to see through it and rule in favor of the more credible valuator.
The best contemporary guide to valuing goodwill I am aware of comes from a 1981 Court of Appeals case. It characterizes goodwill as follows:
a benefit or advantage "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."
Suther v. Suther 28 Wn. App. 838, 627 P.2d 110.
Simply put, what this tells us is that in order to have goodwill we must first have real intangible value, not just a valuator’s artful presentation. If all we have is an ordinary person struggling for an ordinary living, we probably don’t have much goodwill.
A lot of pain, emotional and economic, can be avoided by an early application of realistic assessment and common sense.
Easy to say. Very hard to do.