Over the years, Florida courts have been called upon to address "goodwill" in dissolution of marriage cases. The law, which has remained in line with Thompson v. Thompson, 576 So. 2d 267 (Fla. 1991), has created problems for lawyers, experts, and judges in trying to determine what role, if any, goodwill plays in the equitable distribution of a marital business or component of one spouse's business interest. One significant challenge has been that experts cannot rely on any market sales evidence that includes a noncompete or similar agreement of any kind. In reality, nearly every real-world business transaction requires such agreements to facilitate the sale of a business, even when such business does not indicate any existence of personal goodwill nor quantify the value of such personal goodwill. Thus, experts are being forced to utilize an unrecognized valuation, and not "actual, market-based" evidence, to show any personal goodwill existing separate and apart from the seller's reputation.
Directly on point, a major private markets transaction database commonly relied upon by business valuation experts to develop market-based evidence of value, reported 2,455 private business transactions involving companies that sold in the state of Florida from December 31, 2012, through December 31, 2015. Yet, 96.6% of those transactions included some form of a noncompete agreement, (1) and 47 included an employment agreement or transitional services agreement. (2) This means that more than 98% of transactions reported in the state of Florida during that three-year period would automatically require a Florida court to find that goodwill is separate and apart from the reputation of the seller. (3)
In all of these transactions, the median value for intangibles was nearly 68% of the total purchase price. (4) A significant element of value in these transactions related to value in excess of the tangible net assets (i.e., goodwill and intangible assets). Nearly 88% of these transactions included value in excess of book value. (5) Now, it is highly unlikely that all of the intangible value in these transactions related solely to personal goodwill. In reality, only about 33% of the total purchase prices in these transactions is allocated to identifiable intangible assets, (6) which exist separate from any goodwill. (7) Yet, under Florida law, this information, although highly relevant to appraisers, would not provide "competent evidence of value" according to Thompson and progeny, solely because these transactions include some form of a noncompete agreement.
The rulings in these cases further limit an appraiser's ability to utilize other widely recognized valuation methods, such as the capitalization of earnings method. (8) Florida law firmly claims the most relevant, competent evidence for establishing goodwill is "what a willing buyer would actually pay in a real-world transaction." (9) The real transactional evidence, mentioned above, clearly shows that market transactions between a hypothetical buyer and seller involve a covenant not to compete or similar agreement, meaning, an appraiser is left to make an "assumption" of value presuming a noncompetition agreement or similar agreement; otherwise this simply could not comport with real world market evidence.
Even knowing this, the First District Court of Appeal criticized the use of any method that relies upon the assumption of a covenant not to compete or the continued involvement of the seller post sale. (10) Obviously, this is commonly asked at trial as, "does the buyer require and does your business valuation method assume a covenant not to compete or consulting agreement?" We know nearly all real-world transactions require these agreements. Experts are generally forced to answer this question in the affirmative or risk losing all credibility with the court, leaving experts with limited ability to provide competent, reliable evidence of goodwill using the fair market value standard. A savvy and perceptive attorney can then...