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Application of the Multiattribute Utility
Model (MUM) Process
This is a follow up to an article written by Drew Soshnick of Baker &
Daniels that was in the May issue of Indiana Lawyer, “MUM
on personal goodwill
and enterprise goodwill.” As Mr. Soshnick described in the article,
Multiattribute Utility Model (MUM) is an economic model for distinguishing
enterprise goodwill from personal goodwill in divorce cases. MUM allows
valuation experts to introduce objectivity into an otherwise subjective
assignment. Mr. Soshnick discussed the application in the courts. We will
discuss the application of the MUM process from a valuation expert’s point of view.
The objective of MUM in divorce cases is to determine personal and
enterprise goodwill from the total goodwill of an entity. In simple terms,
personal goodwill is a function of earnings from repeat business that will
patronize the individual, while enterprise goodwill is a function of repeat
business that will patronize the business.
The first step of the MUM process, defining the objective, is an easy step
in divorce cases, personal v. enterprise goodwill. The remaining six steps
are much more involved:
The goal of this article is to briefly
explain each step in the MUM process to provide you with a 10,000-foot view
of the process.
Establish Alternatives. The alternatives define the possible outcomes
in the application of MUM. The alternatives are defined as a range of
percentages of personal goodwill. For example, a range of 0% to 20% results in
an outcome of 10%, a range of 20% to 40% results in an outcome of 30% and
so on. The defined alternatives will be revisited in the evaluation of the
alternative step later in the process. The next step, defining the
attributes, is the most important step in the process.
Define the Attributes. In this step the expert must assess the
attributes’ contribution to the earnings of the business and determine if
the impact on earnings is more associated with the individual or the
enterprise. The attributes are divided between personal goodwill attributes
(PGA) and enterprise goodwill attributes (EGA). The PGAs are grouped by
personal, business and industry to better understand the source and impact
of the attributes. The personal group attributes are ability, skill and
judgment, work habits and age and health. The business group includes
personal reputation, personal staff, personalized name and marketing and
branding. Finally, the industry group includes in-bound referrals, closeness
of contact and important personal nature. The PGAs are a direct reflection
of the consumers that seek out the individual, are referred to the
individual or repeat patronage due to the attributes of the individual.
The EGAs are similarly grouped by business and industry. The business group
includes business reputation, business staff, business name, business
location, multiple locations, marketing and branding and systems and
organizations. The industry group attributes includes in-bound referrals,
repeating revenue stream and copyrights, patents, processes, etc. The EGAs
are a direct reflection of the consumers that seek out the enterprise, are
referred to the enterprise and/or repeat patronage due to the attributes of
the enterprise.
Measure the Utility of Each
Attribute.
Once the attributes are defined, the next step is to measure the utility of
the attribute; “importance utility” and the “existence utility.” Each
attribute is weighted for importance to the earning of the business
according to a scale of “least important,” “moderately important” and “most
important.” Then each attribute is weighted for existence in the earnings of
the business according to a continuous scale of “weak presence” (0) to
“strong presence” (4). After the attributes are weighted, the results are
aggregated in the next step.
Aggregate the Results. The attributes are divided into two groups -
personal and enterprise. The importance utility is multiplied by the
existence utility for each attribute to determine the multiplicative utility
of each attribute. The two groups are subtotaled so there is a PGA utility
and an EGA utility. The total of the two groups is the “total multiplicative
utility” (TUM). The results are converted to percentage of TUM, PGA/TUM and
EGA/TUM. Now that we have utility percentages for PGA and EGA, the results
are applied to the defined attributes outcomes and evaluated by the expert.
Evaluate the Alternatives. The resulting utility of personal and
enterprise goodwill are evaluated in terms of the alternatives established
in the previous step. The expert analyzes the attributes and utilities to
determine the overall reasonableness of the results. The review and
sensitivity analysis is an important step in MUM for the expert to challenge
and confirm all aspects of the MUM process. Once the outcome is determined,
the next step is for the expert to express an opinion.
Express an Opinion. The final step in the MUM process is for the
expert to express an opinion. The personal outcome percentage determined in
the evaluation step is multiplied by the total goodwill. The result is
personal goodwill. The difference between total goodwill and personal
goodwill is the business’s enterprise goodwill.
The MUM process provides experts with consistency, introduces objectivity
into an otherwise subjective assignment and provides for sensitivity
analysis of the outcome, which will allow experts to better defend their
personal and enterprise goodwill conclusions in court. We hope that this
article has provided you with an understanding of the application of the MUM
process from a 10,000-foot view.
Somerset can assist you and your clients in
marital dissolution matters by applying the MUM process. Please contact
a member of our
Litigation & Valuation Team for more
information.
Somerset CPAs, P.C.
3925 River Crossing Parkway
Indianapolis, Indiana 46240
317.472.2200 or 800.469.7206
317.208.1200 (fax)
www.somersetcpas.com
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