5 Key Points to Understanding Goodwill in Divorce Valuations
In a business valuation for a divorce case, often the husband and wife own a business and want the trier of fact (Judge) to divide the business equitably based on their respective shares of the business. However, things become complicated when intangible assets like name, reputation, expertise, customers lists, location, quality of employees, hours worked and more need to be valued. This is the most challenging aspect of divorce valuations: The valuation of Goodwill.
Goodwill is a generic term that represents a bundle of intangible assets and/or sometimes a single intangible asset (calculated as residual value). It is defined as “non physical assets (such as franchises, trademarks, copyrights, goodwill, equities, mineral rights, securities and contracts) that grant rights, privileges and have economic benefits for the owner.”
The five key points to understanding goodwill in a business valuation for divorce are:
1- Jurisdiction: Goodwill is handled in a divorce setting differently depending on the jurisdiction of the court. In some jurisdictions, goodwill is not part of divisible marital assets (Wisconsin). Whereas in others, goodwill is absolutely part of the marital assets.
2- Types of Goodwill: There are three types of goodwill:
Institutional Goodwill (Industrial /commercial business enterprise)
Professional Goodwill (Personal and Entity Goodwill in professional practices like dental, law, accounting, medical and others)
Celebrity Goodwill (sports celebrities, entertainment celebrities, and achievement celebrities)
In divorce cases Professional Goodwill is the focus of the valuation analyst. It includes the personal goodwill created by the experience, the reputation, the skills of the practitioner and the enterprise/entity goodwill created by the location, reputation, longevity, assembled assets, and operating procedures of the practice. The main issue here is to determine who owns each of the two components.
3- Personal & Enterprise Goodwill: It is not uncommon in many jurisdictions that personal goodwill is not part of the marital assets. In those jurisdictions only enterprise goodwill is recognized as part of marital assets. Conversely, in many other jurisdictions, both personal and enterprise goodwill are considered marital assets. This makes valuation for divorce very complex and thus requires from the valuation analyst to work closely with the attorneys in the case to find out the particulars of a specific jurisdiction.
4- Dividing Personal and Enterprise Goodwill: There are no generally accepted methods to divide goodwill into personal and entity components. The court ruled that if a business can be sold or transferred in a market transaction, entity goodwill might be included in the value of the company. However we are not sure what percentage of entity and/or personal goodwill is in the sale price.
Another way of separating enterprise goodwill from personal goodwill is by analyzing factors such as: Age and health of the professional, the professional’s demonstrated earning power, the professional's reputation in the community for judgment, skills, and knowledge, the professional's comparative professional success, and the nature and duration of the professional’s practice.
5- Additional Factors: Factors such as marketability of the practice, types of clients and services, location and demographics, fees structures, source of new clients, and individual practitioner’s amount of production are important in allocating goodwill between personal and entity goodwill.
Valuations for divorce proceedings are very complex and require the knowledge and experience of a Certified Valuation Analyst (CVA) to get them done appropriately. If you need more information don't hesitate to contact us for your valuation needs.
Achille Ekeu, MBA, CVA
The Washington Valuation Group
He is a Certified Valuation Analyst and Member of the National Association of Certified Valuators and Analysts (NACVA) in the DC-MD Chapter. He is also a Management Consultant Member of the Institute of Management Consultants (IMC-USA) in the National Capital Chapter. He can be contacted by phone at 240-274-9570 or by email at firstname.lastname@example.org.