Eberting v. Eberting - 2012 - Enterprise Goodwill Allowed in Orthodontic Practice
ALYSON LEIGH AMONETTE EBERTING v. JEFFREY JENNINGS EBERTING
Appeal from the Chancery Court for Knox County
No. 171599-1 John F. Weaver, Chancellor
No. E2010-02471-COA-R3-CV - Filed February 27, 2012
Robert Vance testified as the expert witness in this case in Knoxville, TN. Vance valued the orthodontic practice at $700,000 using a combination of the Market Transaction Method using the Goodwill Registry and the Capitalization of Net Cash Flow Method. The opposing expert valued the practice at $224,000 using the Adjusted Net Asset Value Method, which was lower than the price Husband paid for the practice a few years before. The Trial Court ultimately ruled the value to be $500,000 which was a value placed on the practice personally by the Husband in several personal financial statements filed with banks. The Trial Court was very aware that the $500,000 value did include an element of goodwill.
The trial testimony revealed that Vance did not include personal goodwill in his value, but only included enterprise goodwill of $430,622 in the $700,000 value, with the remainder of the value being "hard assets" minus debts. The ultimate conclusion is that the Trial Court allowed enterprise goodwill in the final value and the Appellate Court upheld that ruling. The testimony about goodwill includes:
When asked about goodwill, Mr. Vance stated:
Goodwill or blue sky, whatever you want to call it, it is enterprise goodwill. It’s not personal, because it is a very basic tenet, I think, in logic that someone is not going to purchase or pay for something of which they can obtain no value.… It’s a catchall phrase. Just the basic definition of goodwill is what a business or a practice sells for or what it’s valued at over and above its hard assets; hard assets being cash, receivables, and equipment basically, minus the debt. So if it sells for more than what those things were I just mentioned, well, then it has some goodwill or it’s valued to have goodwill. And that goodwill is sort of an all encompassing term that could include an assembled and highly trained work force, equipment operating and in place, and a person is trained to operate that equipment. That’s very important. Equipment in place and operating is worth a lot more than the exact same equipment sitting in a box or in a warehouse, because it’s in place and it’s operating. The location, a state-of-the-art facility in a location, repetition, recognition by the community. That’s all very important. So location and convenience. And of course, the obvious one, the patient charts, the actual patient charts themselves have some value. Plus all of the referrals and all that go along. The families that go along with those patient charts and their neighbors and who they know and their friends, that’s a good referral base. All of that rolled up together is goodwill, which gives you a value over and above your hard assets.
Mr. Vance also testified:
...if you take my $700,000 value number and break it down among the hard assets....cash, receivables, other deposits, and our estimate of fair market value, the total hard assets... are $514,487. And you’ll find those numbers basically on the balance sheet someplace. Minus the accounts payable, minus the installment debt equals a net equity of $269,000. And if you subtract $269,000 from our $700,000 value, there is an implied goodwill in there of $430,622, because, as I said, a value or selling price that’s over and above, goodwill is the value over and above its hard assets....
When asked if the amount of goodwill were subtracted from his $700,000 if the resulting value would be $270,000, Mr. Vance stated: "That’s correct, if you went with a net asset value method, which of course is not the real value of this company." Mr. Vance also stated: "If you were to strike the personal goodwill, this clearly has enterprise goodwill associated with it. It’s not all personal to him.”