Proper Evaluation of "Goodwill" of a Business During Divorce
Posted by Michelle May O’Neil on May 23, 2011

 

This article deals with people who own a service business and are the focal point in their business. In most states the assets owned by an individual going through a divorce must be valued. This includes a business that one spouse may own. The value of the business may include both tangible assets and intangible assets. The majority of the value of the intangible assets may be related to "goodwill". Goodwill is defined as the characteristics of a business or individual that cause customers to return to that business or person.

 

In many cases, the value of the business or practice is determined based on the earning stream of the business. The concern to the spouse who owns the business, and who also has a spousal support obligation is that the earning stream used to value the business is also used to pay the spousal support obligation. This is what is called the "Double Dip Theory".

In many states, this situation is avoided when the portion of the business that is related to "Personal Goodwill" is excluded from the value of the business, or "Enterprise Goodwill". Thus, it is very important to identify and differentiate Personal Goodwill from Enterprise Goodwill.

 

These two types of goodwill can be defined as follows:

  • Enterprise Goodwill is associated with the entity itself. It takes into consideration issues such as location, qualified workforce, required licenses, name, etc. The key is that the value of the business is separate from the individual owner.
  • Personal Goodwill is associated with the individual. It takes into consideration the individual’s age, health, personal reputation, training and effort. Customers return to the business because of the individual. The value of the business does not exist absent the individual.

The key is whether the Goodwill can be sold or transferred independent of the individual. Generally, Enterprise Goodwill is considered to be "saleable", but Personal Goodwill is not. Here is a simple check list to determine Personal Goodwill or Enterprise Goodwill:

  • Is the value of the business or professional practice inseparable from the actions, skill, the expertise and reputation of the individual owner?
  • Is the value of the company, other than the hard assets, such that it cannot be Transferred without the individual?
  • Can the economic benefits of the company to be transferred be realized only through the performance of post-divorce services of the individual?
  • Is the revenue or the ability to acquire future income tied directly to the efforts of the individual?
  • Is the ability of the entity to attract referrals separate and apart from the persona of the individual?
  • In summary, make sure that your divorce attorney is aware of the key aspects of your business and the importance of you, individually, to the success of the business in an effort to avoid the perils of the Double Dip.


Hat tip for this article to Bruce Richman (CPA/ABV, CVA, CDFA™), author of the book Guide to Tax and Financial Issues in Divorce.

 

For more articles on assistance regarding business valuation, visit http://www.divorcemag.com/articles/Business_Valuation/.

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Photo of Michelle O'Neil Michelle O'Neil

Michelle May O’Neil has 27 years’ experience representing small business owners, professionals, and individuals in litigation related to family law matters such as divorce, child custody, and complex property division. Described by one lawyer as “a lethal combination of sweet-and-salty”, Ms. O’Neil exudes…

Michelle May O’Neil has 27 years’ experience representing small business owners, professionals, and individuals in litigation related to family law matters such as divorce, child custody, and complex property division. Described by one lawyer as “a lethal combination of sweet-and-salty”, Ms. O’Neil exudes genuine compassion for her client’s difficulties, yet she can be relentless when in pursuit of a client’s goals. One judge said of Ms. O’Neil, “She cannot be out-gunned, out-briefed, or out-lawyered!”

Family Law Specialist

Ms. O’Neil became a board-certified family law specialist by the Texas Board of Legal Specialization in 1997 and has maintained her certification since that time. While representing clients in litigation before the trial court is an important part of her practice, Ms. O’Neil also handles appellate matters in the trial court, courts of appeals and Texas Supreme Court. Lawyers frequently consult with Ms. O’Neil on their litigation cases about specialized legal issues requiring particularized attention both at the trial court and appellate levels. This gives her a unique perspective and depth of perception that benefits both her litigation and appellate clients.

Top Lawyers in Texas and America

Ms. O’Neil has been named to the list of Texas SuperLawyers for many years, 2011-2018, a peer-voted honor given to only about 5% of the lawyers in the state of Texas. In 2014-2018, Ms. O’Neil received the special honor of being named by Texas SuperLawyers as one of the Top 50 Women Lawyers in Texas, Top 100 Lawyers in Texas, and Top 100 Lawyers in DFW. She was named one of the Best Lawyers in America for 2016 and received an “A-V” peer review rating by Martindale-Hubbell Legal Directories for the highest quality legal ability and ethical standards.

Author and Speaker

A noted author, Ms. O’Neil released her second book Basics of Texas Divorce Law in November 2010, with a second edition released in 2013, and a third edition expected in 2015.  Her first book, All About Texas Law and Kids, was published in September 2009 by Texas Lawyer Press. In 2012, Ms. O’Neil co-authored the booklets What You Need To Know About Common Law Marriage In Texas and Social Study Evaluations.  The State Bar of Texas and other providers of continuing education for attorneys frequently enlist Ms. O’Neil to provide instruction to attorneys on topics of her expertise in the family law arena.