September 7

Divorce Case Study: Valuation of Business Coach


Commercial Goodwill vs. Value to Owner

Lorna provided business coaching services.  She was a solopreneur.  She didn’t have employees.  Lorna did all the jobs running the business: executive, admin, billing, marketing, sales, accounting  and operations.

Lorna’s Learning Ltd.

Ten years ago, Lorna incorporated her business, calling it “Lorna’s Lessons Ltd.”. Lorna’s Lessons Ltd. or LLL was a legal entity, separating Lorna’s personal assets, liabilities, revenue and expenses from the business’ assets, liabilities, revenue and expenses.  LLL paid Lorna a salary, a good salary, from her efforts.

Lorna’s business delivered a proven, trademarked method of business coaching designed by a famous business coach.  She had an Independent Contractor Agreement to deliver these services, under the trademarked name.  This Independent Contractor Agreement was between the famous business coach and Lorna.  The agreement contained a clause that it was not transferable, under any circumstances.

The business had few tangible assets, mostly cash, accounts receivable and a small investment in computer hard- and software.  LLL had a little debt outstanding to a third party.  LLL took on the debt to buy the Independent Contractor Agreement.  The Agreement was not listed on the Balance Sheet.  The tangible assets backing the business was about $50,000.  This was the value of the operating assets less the operating liabilities, each valued at fair market.

The business was long standing, having operated for 10 years delivering stable financial returns.  LLL generated earnings before interest, taxes, depreciation and amortization or EBITDA of about $100,000 per year on revenue of about $250,000 or 40% of revenue.  The value of the business was determined to be about $250,000 or 2.5 times EBITDA.  The value in the business was almost entirely goodwill, generated by Lorna delivering the coaching services.

Divorce & Equitable Settlements of Marital Assets

Lorna came to Troy Valuations because she was getting a divorce.  Lorna wanted to settle her divorce with an equitable division of marital assets.  She hired Troy Valuations to give an opinion of the value the business to help her, and her lawyer, negotiate the equitable settlement.

Fair Market Value

Fair Market Value is defined as the highest 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 arms-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.

Value Conclusion

We agreed that there was significant value in the business: about $250,000.  However, the financial results were due to the Independent Contractor Agreement which was non-transferable.  Any buyer of the business would not be able to use this contract, they would not be able to get the clients, they would be unable to use the trademarked method of the famous business coach. We determined that the value of the goodwill was in the form of value to owner, not commercial transferable value.

We reached the conclusion that under the definition of fair market value, the commercial transferable value of the business was $50,000 or the difference between the operating assets and the operating liabilities. 

Lorna used our report to negotiate an equitable settlement of the marital assets, completed her divorce and moved on with her life.


Fair Market Value

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