In our prior blog we discussed the types of value such as fair market value and fair value. A standard of value is the accepted method for valuing an enterprise in a particular situation such as for a divorce or a partnership dispute. In ascertaining the standard of value for divorce there is no set standard, the way it is handled is to look at court cases. A landmark case in Arizona, a community property state, is the case of Mitchell v. Mitchell. This is a divorce case that went up to the Arizona Supreme Court on appeal. It was appealed because of the lower courts treatment of professional goodwill in the case. As Arizona is a community property state, the lower court awarded the wife half of the value of the husband’s accounting firm. The case was then sent up on appeal for review. Upon review, the Court of Appeals reversed the judgment of the trial court and remanded the case for a redetermination of the value of the partnership interest without any value on goodwill. The Court of Appeals also held that the goodwill of a professional partnership is not a divisible community asset. In making this assertion the Appellate Court distinguished an earlier Arizona case of Wisner v. Wisner, 129 Ariz. 333, 631 P2d 115 (App. 1981) which held that a professional corporation’s goodwill was not property subject to equitable distribution under A.R.S. §25-318. The Court made the analogy that the goodwill in a professional partnership is a personal achievement, such as an educational degree, which cannot be exchanged in the open market.
If you find yourself, or have a client, in the unfortunate situation of divorce, and involves a business, you should do your research and have a business valuation done by an appraiser that is experienced and certified. You want the appraisal to be thorough and defendable when going to court.
You can read the full brief for Mitchell v. Mitchell by clicking the link below.
Matthew Cassedy a Certified Business and Machinery and Equipment appraiser. He specializes in the valuation of small to medium size businesses. He can be reached at 480-857-7449.