Valuing Goodwill in a Divorce: Enterprise vs. Personal Goodwill
Written by: Megan Hoss, CPA
Personal goodwill issues often arise in valuation engagements and can be particularly contentious and confusing in the case of divorce. While any marketable goodwill from a business (typically referred to as enterprise goodwill) represents value when dividing property between spouses, personal goodwill is often called into question. This is particularly true when one spouse has a professional occupation such as an attorney, dentist, physician, architect, or accountant. Personal goodwill relates to an individual person, enterprise goodwill is attributable to the entity.
In these cases, it is important to segregate personal goodwill from enterprise goodwill in order to identify marital assets. However, it is even more important to remember that whether personal goodwill can actually be part of marital assets to be divided, varies by state. The differing views among states include:
· Enterprise goodwill is marital property; personal goodwill is not marital property
· Both enterprise goodwill and personal goodwill are marital property
· Personal goodwill may be marital property
· Neither personal goodwill nor enterprise goodwill is marital property
In Oregon, personal goodwill is not considered marital property.
In the 2010 Oregon Court of Appeals case Slater and Slater, the very issue of personal goodwill as a marital asset in a sole-owner professional practice was decided. Mr. Slater was a very successful chiropractor in central Oregon, generating about $600,000 of revenue in 2006. He had one chiropractor employee, three assistants, and a receptionist. In the underlying trial, Ms. Slater’s expert testified that all the goodwill of the practice was attributable to the business and that none of the goodwill was personal goodwill of Mr. Slater. The court of appeals rejected that testimony.
The Court of Appeals noted in the Lankford appellate case that “where a business has no value above and beyond its assets absent ‘the owner personally promis[ing] his [or her] services to accompany the sale of the business’ there is no goodwill.”[1] The Court also agreed with the majority of states around the country, where the courts “have reasoned that it is improper to treat an individual principal's or professional's reputation as ‘goodwill’ or as a divisible marital asset because it is indistinguishable from that individual's probable future earning capacity.”[2]
Segregating the intangible value of a company between enterprise goodwill and personal goodwill can be an inherently difficult task. However, a valuation analyst can consider many objective factors in making the allocation. In any company being valued, there will be evidence of various elements of both personal and enterprise goodwill that can be collected through research and interviews with management. Attributes of personal goodwill can include:
· Expertise, skill, ability, and reputation
· Personal attributes of the individual
· Academic credentials, licensure, experience
· Clients’ confidence in the individual’s skill
· Personal relationships with clients or patients
· Nature of personal services provided
· Individual’s relationship to business profits
· Analysis of business without the individual
To conclude, the treatment of enterprise and personal goodwill in divorce continues to be an evolving topic in the legal and valuation arenas. By utilizing evidence stemming from the specific facts and circumstances of a particular business valuation, Cogence Group’s extensive business valuation experience can better zero in on the degree in which enterprise and personal goodwill exist. Our firm can utilize years of hands-on business valuation experience to help ensure that the parties or the court understand enterprise versus personal goodwill in marital dissolution cases.
Call Cogence Group today to learn more about our experience working with business valuations within the context of divorce.