Valuing Goodwill of a Law Firm in an Arizona Divorce
Goodwill is an intangible asset that can be defined as an advantage a business has as a result of its reputation. Valuing goodwill can be tricky due to its intangible nature. In its published opinion in Walsh v. Walsh, 230 Ariz. 486 (App. 2012), the Court of Appeals examined the methods of valuating goodwill.
Walsh involved a divorce between Husband and Wife, who were both successful attorneys. Husband was a shareholder at the Phoenix branch of a national law firm and the parties disagreed over the community property interest in his professional goodwill.
Appraisal Standard in Valuing Goodwill of an Attorney
Using the realizable benefits standard, Husband’s position was that his goodwill should be valued at $140,000 – which was equivalent to his stock redemption value at the firm.
Using the capitalization-of-earnings approach, Wife’s position was that Husband’s goodwill was worth $1,269,000. The trial court agreed with Husband and valued his interest in the firm to $140,000 and Mother appealed.
The Court of Appeals rejected the trial court’s limited approach to valuing goodwill, finding that the realization benefits approach applied to Husband’s interest in the firm’s assets, not his goodwill based upon his reputation and experience.
The Court of Appeals ruled that the court may apply the Wisner factors in valuing goodwill: namely, the practitioner’s age, health, past earning power, reputation in the community for judgment, skill and knowledge, and his or her comparable professional success.
The Court of Appeals remanded the case to the trial court for a new determination of Husband’s goodwill, with the caveat that in applying the Wisner factors, the court must ensure that it does not divide as community property future earnings that are based solely on the professional’s post-dissolution work effort.
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