What’s the Value of Goodwill in a Business?
The husband and wife were married for 27 years. For a large part of that time, they worked together in the husband’s financial advising business, of which he was the sole owner and directing mind.
That business started off during the early part of their marriage, in the form of a tax-return preparation service. Along the way, the husband registered as a mutual fund dealer and started a second company. The wife devoted a significant amount of time to helping establish and grow both ventures.
For example – even though she was primarily responsible for their children and household duties – she also managed the husband’s physical office location (with the support of daycare), and was even more involved when the children were of school age. She took income tax and accounting courses in the evenings, and gave seminars to try to draw in new clients for the business. She also worked hard to help build it up and make it well-known in their cultural community. She acquiesced in having their matrimonial home be used for both family and business purposes.
When the couple separated, one of the key issues was the present-day value of the husband’s financial advising business. When asked to assess the value of the goodwill, the husband’s expert put it at zero, arguing that unless there was a special purchaser waiting-in-the-wings, the goodwill was worth nothing.
The wife’s expert, using a different approach, valued the business goodwill at approximately $172,500 and indeed considered it to be the most valuable asset that the business had.
The court accepted the wife’s position. The book of business clearly had a value, since the husband was currently part of an arrangement with a third party, whereby he was committed to pay them 35 percent of the commissions earned on investments made for his clients. The third party provided administrative and office support to these investor clients, in return. As the court put it,
These clients continue to seek [the husband’s] advice and he continues to earn money from that advice because of the goodwill built up over the two decades that he has had the business. The book of business was the product “produced” by the business that both parties contributed to, I find, during the course of the marriage.
Moreover, even the husband had since de-registered as a mutual fund dealer, he was still administering and managing his clients’ book of business. In his agreement with the third party, he was keeping his book of business under his own control.
The difficulty with the approach of the husband’s expert, the court said, was that he was assessing the value as a corporation, rather than as a business. In contrast, the wife’s expert approached the matter by assuming that any financial advisor who wanted to add to their book of business would pay a multiple of revenues, and would “step into the shoes” of a financial advisor. He or she would simply add to their existing client base on the basis that his or her existing infrastructure would provide capacity to add revenue, but with little impact on the cost of the providing the service to these new clients.
Stepping away from business principles to focus on Family Law ones, the court noted that marriage is a “form of partnership”; once it breaks down, the law requires the sharing of all of the wealth of the parties accumulated during the marriage. The court explained how those concepts applied to the current scenario:
The fact that something is not transferable does not mean that it is not property and does not have a value. I accept that while [the husband and wife] lived together in their marriage and worked together, the business had built up excellent relationships with customers, employees fostered, and contacts were made that became part of the book of business. It has a value and [the wife] is entitled to share in that value.
The court accepted the $373,000 business valuation offered by the wife’s expert, and granted the wife a spousal support and equalization order secured against the husband’s company. The husband was also ordered to notify the wife if he intended to dispose of any of the shares of the corporation.
For the full text of the decision, see:
Abu-Saud v. Abu-Saud, 2019 ONSC 6303
