How do noncompetition agreements affect business valuations in Utah dissolution cases? Peterson v. Jackson Explained

In Peterson v. Jackson, the Utah Court of Appeals addressed a critical question in business valuation law: whether personal goodwill should be deducted from a company’s value when a departing shareholder has signed a noncompetition agreement.

Background and Facts

Jack Peterson, along with Alan Allred and Scott Jackson, were the sole shareholders in Peterson Allred Jackson, a certified public accounting firm. When conflicts developed among the partners in 2006, Peterson filed for dissolution. Allred and Jackson elected to purchase Peterson’s 36.37% share in lieu of dissolution under Utah Code § 16-10a-1434. The parties’ experts valued Peterson’s shares differently—$505,625 versus $224,639—requiring judicial determination of fair value.

Key Legal Issues

The primary dispute centered on whether Peterson’s personal goodwill should reduce the company’s overall valuation. Peterson had signed a noncompetition agreement prohibiting him from soliciting the firm’s clients for two years after departure. The remaining shareholders argued that Peterson’s personal goodwill should be excluded from the valuation, while Peterson’s expert included it without reduction.

Court’s Analysis and Holding

The court of appeals affirmed the trial court’s $459,000 valuation, which included Peterson’s personal goodwill without reduction. The court applied established Utah precedent recognizing three valuation approaches: asset value, market value, and investment value. Critically, the court found that Peterson’s noncompetition agreement “effectively transferred his personal goodwill to the Company.” The court distinguished between enterprise goodwill (attached to the business entity) and personal goodwill (associated with individuals), concluding that valid noncompetition agreements can convert personal goodwill into enterprise goodwill.

Practice Implications

This decision provides important guidance for Utah practitioners handling business dissolutions and valuations. First, noncompetition agreements can significantly impact goodwill analysis in professional services firms. Second, courts will consider whether the business continues operating as a “well-entrenched institution” rather than depending on any single individual’s earning capacity. Third, practitioners should ensure expert reports adequately address how employment agreements and restrictive covenants affect the treatment of personal versus enterprise goodwill in their valuation methodologies.