When divorcing parties own business interests, it can complicate a divorce. Valuing these business interests is often complex and requires the assistance of a business valuator.
Business valuations can be expensive and take time. They have all kinds of nuances and can appear pretty subjective. Both parties often hire a business valuator, typically a forensic accountant. The judge must then determine which business valuator’s opinion is more credible.
What Is Goodwill in Business Valuations?
One of the most challenging aspects of evaluating a family business is its ” goodwill.” And, no, we are not talking about the second-hand store. Some states include various types of goodwill in the fair market value analysis. Further, some courts differentiate between “enterprise” and “personal” goodwill.
Personal goodwill (or “professional goodwill”) is attached to a particular individual rather than the individual’s business. Typically, personal goodwill exists with smaller companies where one party is a driving force.
Enterprise goodwill (or “business goodwill”) is derived from characteristics specific to a particular business, regardless of who owns or operates it. Enterprise goodwill generally occurs with larger corporations with a well-known brand.
How Does Goodwill Work With Business Valuations?
At last check, twenty-four states and the District of Columbia exclude personal goodwill from the marital estate. However, nineteen states include personal goodwill in the marital estate. Eight states have no formal precedent. Thus, it is uncertain what would occur in these jurisdictions.
Where goodwill is included in the marital estate, suppose the buyer pays very little for the business due to expected losses of repeat customers or specific referrals to the newly formed competing entity. In that case, this points to a high degree of personal goodwill. If the selling owner were unlikely to poach clients or customers away from the entity they sold, then there would likely be a higher degree of enterprise goodwill.
The common argument for including goodwill in fair market value is that otherwise, the court is ignoring the contributions of the non-professional spouse to the creation of the professional spouse’s business, earning capacity, and career. Common arguments against including goodwill are that it is highly speculative, results in inflated values, and requires the professional spouse to compensate the non-professional spouse for earnings they may never acquire.
