Small business fuels more employment in the United States than larger corporations and businesses. It is often the case one spouse works for a company to obtain benefits like health insurance, allowing the other spouse to start and run a small business—a part of the American dream. When a divorce is filed, the parties are often left with determining what makes up the small business’ value, as all marital assets acquired or brought into the marriage and existing at the time of filing are marital assets subject to a fifty-fifty division. This blog covers the basics of how and what a small business is valued.
At the outset, there are expectancies, such as unvested stock options, which are not marital assets because they may never vest and have no value. Similarly, with a small business, there is a portion of this business that is not a martial asset because it is unique to the business owner, namely personal goodwill. At the outset, it should be noted that physical assets, such as tools, are clearly a part of the business that is divisible in the martial estate. Where significant valuation questions come up is with good will, although there other more complex valuation methods, such as using an income approach or a market approach to value.1
So, what is good will and why is some of it valued and a part of the marital estate and other parts of good will a marital asset to be divided upon divorce? To understand “goodwill” and how it will factor into an expert’s overall valuation one must have an understanding of “goodwill” broadly. Generally speaking, a business’s reputation, patronage, and other intangible assets are considered when appraising the value of the business. Under “goodwill” there is “personal” goodwill and “enterprise” good will. Both must be considered in a business valuation.
“Personal” good will is best understood by example. Let’s assume the husband is a mechanic at a car dealership. His “personal” good will is the skills he possesses as a mechanic and unique to him and that only he can use to generate income. However, take it a little further imagine the husband owns a brick and mortar garage and employs several people; with the garage having its own identity and is sought out because of the garage’s reputation, not the individual reputation of the husband. Namely, it has value because the name is associated with a high-quality auto repair garage. That value is “enterprise” good will that is a martial asset. In other words, if husband left the garage, its name has value. This is “enterprise” goodwill because another mechanic (or non-mechanic) could purchase the name and building, and it would still operate.
In many cases, “personal” good will and “enterprise” good will exist with a small business. When it is valued, “personal” goodwill is not a marital asset because it is only useful for our hypothetical mechanic at this point. Much like a professional license, such as a nurse, are valuable only to him or her. Yet if this nurse or a doctor sets up a business and builds a brand with other nurses or physician there will be a mix of “personal” goodwill and “enterprise” good will. The doctor’s “personal” goodwill would not be a part of his practice but the practice itself has “enterprise” goodwill.
Ultimately, when a small business is involved in any divorce case, it is key to have counsel who understand the components of good will as well as the methods to value a business in order to have the proper evidence for trial. Without such, it is probable the court will not have the necessary evidence to properly consider “personal” good will from “enterprise” good will. Any seasoned family law attorney knows the value of a good valuation. That said, there are numerous cases that have gone on appeal where the party argues the value was not proper. However, failure to put this in the evidentiary record is inviting the error and the higher appellate affirming.
If you case involves a small business, it is key to hire experienced domestic counsel to that understands how a business is valued and obtain a valuation for use at trial. Without this you could be leaving thousands, hundreds of thousands, or millions undivided; providing your spouse a windfall. This blog was written by attorneys at Dixon & Moseley, P.C. who handle domestic cases across the state. This blog is for general educational purposes only. It is not intended as legal advice or a solicitation for legal representation. It is an advertisement.