Proper Evaluation of "Goodwill" of a Business During Divorce
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:
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:
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/.