She pushed him out of their jointly owned hairdressing salon operating in the tony Auckland suburb of St Heliers. He could claim a share of the business goodwill even though there was nothing to prevent him poaching existing customers.
Starting business together as Saints Hair Design in 2007, Deborah Wallace and Hakan Altan fell out with Ms Wallace calling the police six years later to boot him out and then issuing a trespass notice and changing the locks. Later they were in court arguing over a valuation of Mr Altan’s share of the business.
For service businesses like hair salons, substantial value typically lies in goodwill: representing the value of future profits to be generated from present clientele returning. Having generated this goodwill, present owners extract from any purchaser a share of future expected revenue. With the departure of Mr Altan, Ms Wallace was in effect ‘purchasing’ the goodwill in determining the size of his payout. Ms Wallace said goodwill was zero. Mr Altan was not subject to any agreed restraint of trade. He could have immediately set up next door to Ms Wallace’s continuing business at Saints Hair; existing customers could walk straight in to his rival business. The High Court was told Mr Altan in fact went to work at another hair salon in a neighbouring suburb. He actively canvassed just over fifty per cent of Saints Hair’s client list. About ten per cent moved with Mr Altan to his new salon.
In the absence of any agreement between partners, the Partnership Act requires that all business assets be split equally. This includes the value of goodwill. Justice Whata ruled Mr Altan was entitled to a fifty per cent share of Saints Hair goodwill, with a deduction for the ten per cent of clients who had followed him. While the general rule is that there is no goodwill in a service partnership if departing partners are not bound by a restraint of trade, that will depend on the nature of a particular business, Justice Whata said. Location can affect goodwill. Many customers may return because a business is in a prime location, not because of any particular attachment to the person running the business.
There was a dispute between accounting experts as to the value of goodwill in Saints Hair back in 2013. Goodwill was ruled to be worth $130,750. The hair salon generated net profit before tax of $116,000-$145,000 in four years prior to the acrimonious split.
Mr Altan was also entitled to share in the salon’s profits generated between the time he was kicked out and the time he was compensated for his share of the partnership assets, Justice Whata ruled. No figure was set. Further evidence is required of the salon’s trading history whilst under the sole control of Ms Wallace. She changed the name of the business to Saints 55 after Mr Altan’s departure.
Wallace v. Altan – High Court (12.06.18)
18.121