How Do Courts Value the “Goodwill” of Businesses in Alberta in Family Property Division?

Consider this fact scenario – you own a dental practice and are getting a divorce. The dental practice, if acquired during the relationship, is subject to family property distribution.

The Fair Market Value of the business for purposes of property distribution should include a value for “goodwill”.

What is Goodwill?

Goodwill will be the additional value attributable to a business for its clientele, company, brand, and reputation.

Upon the sale of a dental practice, for example, many of the patients will remain patients of the clinic and that attributes additional value to the practice.

How Do Courts Value Goodwill?

What is clear from the caselaw is that there is no one way that courts are valuing the goodwill of businesses in Canada. Experts are often employed by the parties to guide the court in its analysis. Where there are two reasonable, but different determinations, the court prefers to impute the value of the business using the midway point.

The case law also provides as follows:

• If there is an offer for purchase, the offer less sale expenses is the most accurate valuation of the business as a whole (see for example Cahill v Weaver, 2005 ABQB 618). There is, however, consensus amongst experts that multiplying the three-year gross income average of the practice by a market value factor of 0.33 is a reasonable method of determining the goodwill of a dental practice in Alberta for matrimonial asset distribution (Cahill v Weaver, 2005 ABQB 618).
• Where there are two experts employed by the parties (i.e., one by the husband and one by the wife) to perform a valuation of the business, the court will often use the midway point of the two valuations (see for example, Koch v Koch, 2017 ABQB 596; David v David, 2004 CanLII 46652 (ONSC)). There can either be positive goodwill or no goodwill, but not negative goodwill (Koch v Koch, 2017 ABQB 596).
• There is an argument that although there may be goodwill attributable to a business, it will only be realized upon the sale of the business. Therefore, if there are no plans to sell there is no evidence of existing goodwill (see for example, AKS v KLJ, 2014 ABQB 188).
• Canadian courts have accepted expert evidence where goodwill was calculated based upon average billings over three years multiplied by 1½ (CM v NL, 2020 BCSC 3).
• The context surrounding the specific business/practice including its location, the type and number of clients, the services offered, etc. will all affect the overall (and goodwill) value of the business (Roper v Roper, 2008 BCSC 1174).
• Canadian courts have rejected the argument that a dental practice has no goodwill at all, opining that the client base gives the goodwill at least some additional value (see for example, Beug v Schmidt, 2008 SKQB 380).

In short, there is no black and white answer for the value of goodwill attributable upon marriage breakdown, but the first step to answer your complex legal questions is to retain competent counsel to assist you.