Valuators and the courts have long struggled with the distinction between personal and enterprise goodwill in divorce valuations. In 2004 David Wood introduced the multi-attribute utility model (MUM) to the valuation community. The model attempts to quantify the attributes of the personal and enterprise goodwill of an organization. Over the ensuing seven years it has developed a following in the BV community.
Recently the model passed a Daubert challenge in Oklahoma (Lieberman v. Lieberman FD2008-956). The challenge centered on the lack of peer review associated with the MUM. The valuator testified that the mathematics, assigned weights etc. were not questionable and that there were numerous peer reviewed publications that contained discussions and analysis of the method. He also pointed out that no other method for distinguishing personal goodwill had gained any industry wide acceptance.
The judge commented that he appreciated that the expert could clearly explain why he chose each attribute and the weighting of it. “What I liked about MUM is that it allows the expert to take two, eight, six, or 12 attributes that describe a business and weight the attributes to challenge and confirm the expert’s conclusions,” says Judge Funderburk. “While MUM is subjective, it provides experts with the means to explain rationally the attributes they used and the weights they assigned.” In coming to an ultimate conclusion of goodwill value, the judge agreed with the expert’s selected attributes, but added an additional element to account for the brand names sold by the business. “The valuator needs to be able to see the multiple layers of goods and services that make up the business to better assess the factors and benefits of MUM.”
In re Marriage of Alexander, No. 5-05-0109 (Ill. App. 5 Dist. Sept. 7, 2006), the Illinois Court of Appeals, Fifth District, considered whether a theory for separating personal and enterprise goodwill should have been admitted into evidence. Illinois follows the so called Frye test for admissibility: In order for evidence that is both novel and scientific to be admissible, it must be generally accepted in the relevant field. Nonscientific testimony is admissible if it is helpful to the trier of fact. The Fifth District noted that where a witness derives his opinion from generalized knowledge, firsthand experience and observations, and the type of deductive process that is common to everyone, then the testimony is not scientific. The court held, "After conducting a thorough examination of … [the] multi-attribute utility theory, we are convinced that this method does not constitute scientific evidence subject to a Frye hearing."
The court reasoned that "the methodology employed … does not rely on the application of scientific principles, but incorporates basic math with the observations and experience of the valuators." It noted that many of the inputs are the valuator's subjective determinations and "there are [not] universal alternatives, attributes, utility values or ranges that must be applied in each and every situation." Moreover, it reasoned that the mere fact that the method employed elementary math did not convert the process to a scientific process. Rather, and as the expert indicated, the model is designed to make a "precise decision from imprecise and subjective criteria." Therefore, the appellate court affirmed the lower court's decision.
This most recent decision coupled with the Alexander case, gives me plenty of comfort to use the MUM method whenever I need to consider personal vs. institutional goodwill.I would like to hear from my readers about your experiences with this model particularly in a litigation setting.