Goodwill in Dividing Assets

The facts of the case painted a picture of the unusual market conditions for medical practices in the remote area of Palmer, Alaska. There is such an extreme shortage of doctors that a practice can be opened and have a full schedule of patients almost immediately. But despite the opportunity for a thriving practice, evidence was submitted in court that doctors have walked away from existing practices because there was no market for selling them.

The case included testimony from two valuation experts, both Certified Public Accountants. Natalie Manelick’s expert found the fair market value of her medical practice to be $156,497 using the excess earnings and market approach methods. He argued that the practice had no intangible value due to the market conditions in Alaska. His conclusion was based solely on the value of the practice’s tangible assets less liabilities.

Gregory Manelick’s expert used the excess earnings method to arrive at the value of the practice’s intangible assets (goodwill) of $297,000. He concluded that the practice was worth $435,733, including $138,733 of tangible assets. The expert used nationwide data to determine marketability and had no market data on medical practices in Alaska.

The court followed the two-step process used to value goodwill from an earlier case (Moffitt v. Moffitt, 749 P.2d 343, Alaska 1988): 

 First, the court must decide whether goodwill exists.

 Second, it must determine whether the goodwill could actually be sold. The court agreed with Natalie’s expert that there was no market for medical practices in Alaska. *

In conclusion, when valuing goodwill, marketability should be considered in the specific location where it is most likely to be sold.

* Important:  The case cited above took place in Alaska.  The laws in other states may be very different.  Business valuation in marital dissolution cases is highly state law specific.