South Carolina BAR Journal
SC Lawyer, May 2011, #2.
Business Goodwill in South Carolina
South Carolina LawyerMay 2011Business Goodwill in South CarolinaBy Katherine Tiffany, Charles L. Alford and Peter C. Tiffany Trial courts are faced with valuing businesses in different situations, including divorce actions, shareholder oppression cases, estate disputes, unfair trade practices, wrongful death cases and personal injury cases. While South Carolina purports to be a state that adheres to the Fair Market Value (FMV) approach to valuation, South Carolina case law does not always allow goodwill to be factored into a FMV valuation. Yet market evidence indicates that businesses are commonly sold at prices that include goodwill.
A number of definitions are necessary for a thorough understanding of FMV and goodwill:
Fair Market Value
Although South Carolina courts have not precisely defined FMV, most business appraisers in South Carolina apply a definition similar to the one included in the International Glossary of Business Valuation terms: "[T]he price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm's length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts." Because FMV is the price at which property would actually change hands, this price in the real world often includes goodwill.
Goodwill is "an advantage or benefit which is acquired by an establishment beyond the mere value of the capital stock, funds or property employed therein, in consequence of the general public patronage and encouragement which it receives from constant or habitual customers, on account of its local position or common celebrity, or reputation for skill or affluence, or punctuality, or from other accidental circumstances or necessities, or even from ancient partialities or prejudices." Donahue v. Donahue, 299 S.C. 353, 384 S.E.2d 741 (1989). (It is beyond the scope of this article to distinguish between professional goodwill and entity goodwill.)
Advertising, favorable location, website development, development of systems for management and control of various business functions, even participation in visible public service activities, all require an investment of the business owner's resources, both time and money, and all of these foster the development of goodwill. All of these items may enhance a business's earnings; therefore, goodwill is valued by calculating the excess over net asset value (book value) that a buyer in the marketplace would pay for the anticipated earnings stream.
Book value, sometimes referred to as "net asset value" or "equity," is an accounting concept that is simply the difference between the cost of total assets and total liabilities of a business.
Case precedents that conflict with FMV definition
Historically, case precedent in South Carolina uses definitions that inform litigants that FMV is the valuation standard sought by the courts. However, case precedent in some court opinions excludes goodwill. This sets up a conflict in South Carolina for business appraisers between the definition of FMV (which includes goodwill) and the inclusion or exclusion of goodwill. * Court opinions and fair market value. Numerous cases state that business valuations should consider the net asset value, the earnings value and the market value of closely held businesses. SeeSantee Oil Company Inc. v. Cox, 265 S.C. 270, 217 S.E.2d 789 (1975); Metromont Materials Corp. v. Pennell, 270 S.C. 9, 239 S.E.2d 753 (1977); Dibble v. Sumter Iceand Fuel Co., 283 S.C. 278, 322 S.E.2d 674 (Ct. App. 1984); and BelkSpartanburg v. Thompson, 337 S.C. 109, 522 S.E.2d 357 (Ct. App. 1999). These three types of approaches mirror the generally accepted valuation methods (discussed below). They...