Abstract: When the marital estate in a divorce case includes a private business interest, a valuation expert may be needed to allocate value between personal and business goodwill. To determine the proper allocation, courts increasingly are accepting a straightforward approach known as the multiattribute utility model (MUM). This article explains how this model works and how it was accepted in a recent Illinois Second District Court of Appeals case.
In re Marriage of Preston, No. 2-17-0656, Ill. App., Aug. 1, 2018
MUM’s the word
Court upholds simplified method to allocate goodwill in divorce
When the marital estate in a divorce case includes a private business interest, a valuation expert may be needed to allocate value between personal and business goodwill. That’s because more than half the states exclude the former from the marital estate, depending on state law, legal precedent and case facts.
To determine the proper allocation, courts increasingly are accepting a straightforward approach known as the multiattribute utility model (MUM). Here are the details, including a recent court decision that permitted its use.
How it works
The MUM is used to support decisions in a variety of disciplines, including economics, politics and science. It applies scientific methodology to an imprecise, subjective analysis.
In the context of goodwill, an expert generally identifies several attributes that are indicative of either:
- Personal (or professional) goodwill, such as specialized knowledge, in-bound referrals and personal reputation, or
- Business (or enterprise) goodwill, such as location, systems and outbound referrals.
Then the expert assigns weights to each attribute, depending on existence (meaning the strength of the attribute’s presence) and its importance (relative to other attributes). These weights are multiplied to produce a “multiplicative utility” factor for each attribute, and the factors are added together. The objective is to express personal and business goodwill as percentages of the total goodwill.
Case in point
The MUM was used in a recent Illinois Second District Court of Appeals case. In In re Marriage of Preston, the husband was the sole shareholder in a manufacturing company that had almost $3.1 million of goodwill.
His expert applied a MUM with 10 personal and business goodwill attributes. He assigned each attribute a value of either 1 if it had a “significant presence,” or 0 if it was weak or not present.
Based on the score of 6 for personal goodwill and 3 for business goodwill, the expert attributed two-thirds of the total goodwill to personal goodwill. That’s almost twice the amount the wife’s expert allocated to personal goodwill. Her expert compared projected cash flows over five years if the husband were to leave the company with vs. without a noncompete agreement.
The trial court accepted the estimates made by the husband’s expert. On appeal, the wife attacked the MUM as “far too subjective, and far too suspect” for the courts to accept. The appellate court recognized that the MUM includes some subjective components, but it pointed out that even the wife’s expert acknowledged its acceptance in the business valuation industry.
Bringing science to subjectivity
The MUM introduces elements of consistency, order and objectivity when performing a subjective task, like the allocation of goodwill. That’s why courts are increasingly embracing this concept in divorce cases that include a business interest.