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Business valuations can cripple the day to day of any business. They are expensive and time-consuming. A business valuation not only considers the historical financial information of the company but also looks at the projected future revenues and expenses of the company to determine a fair market value. Of course, every business owner I have encountered believes that “they are the company” and without them, the company would collapse and be worthless. Would it though? In evaluating the worth of a business, a forensic expert will first look at whether there is any “goodwill.” Goodwill is nothing more than the excess value of a business over its book value. Any excess of price over the fair market value of the net identifiable assets is deemed goodwill.

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There are two types of goodwill, enterprise and personal. Enterprise or “purchased” goodwill is the value of the entire enterprise, made up of multiple branded businesses. The best example of this is a franchise like Culvers. Culvers has inherent value in excess of its book value due to the franchise itself, and not that of the particular owner of the franchise. Enterprise goodwill is a marital asset subject to equitable distribution in a divorce. Factors generally supporting “enterprise goodwill” are: large businesses, which formalized its organizational structures and institutionalized its systems and controls; owner-employee has signed a pre-existing covenant not-to-compete with the business; owner-employee has employment agreement with the company; the business is not heavily dependent on personal services; the business has significant capital investments in either tangible or identifiable intangible assets; the company has more than one owner, some of whom are not employees; company sales result from name recognition, sales force, sales contracts and other company-owned intangibles; company has supplier contracts and formalized production methods, patents, copyrights, business systems, etc...; business has a favorable location; business has established systems and organization; business has significant repeating revenue stream; business owns intellectual property assets; there is marketing and branding in name of business; and the company’s employees are subject to employment agreements or covenants-not-to-compete.

Personal goodwill, on the other hand, is a non-marital asset not subject to distribution in a divorce. It is the measure of the value “with” the owner in place vs. the value of the business “without” the owner (and where that owner is not subject to a non-compete agreement). Florida courts link the concept of personal goodwill to a non-compete agreement. These courts reason that any goodwill value that is dependent upon the assumption of a covenant not to compete must include an element of personal goodwill. In&nbsp;Walton v. Walton, the court found that the most telling evidence of the lack of any institutional goodwill was the wife’s expert’s testimony that “no one would buy the practice without a non-compete clause.” The court reasoned that “if the business only has value over and above its assets if the husband refrains from competing within the area that he has traditionally worked, it is clear that the value is attributable to the personal reputation of the husband.” Similarly, in&nbsp;Williams v. Williams, that court concluded that the most “…telling evidence of the lack of [institutional or enterprise] goodwill…” is that “…no one would buy [the business] without a non-compete…."

The following factors support finding “personal goodwill”: ability, skills and judgement of the owner; work habits of the owner; reputation of the owner; age and health of the professional; comparative professional success of the owner; years of experience; licenses, specialties and awards; interpersonal skills and personality; closeness of contact; important personal nature attributes; marketing and branding in name of the owner; referrals to the owner; small entrepreneurial business highly dependent on employee owner’s personal skills and relationships; no covenant not-to-compete between company and employee-owner; no employment agreement between company and employee-owner; personal service is an important selling feature in the company’s product or services; no significant capital investment in either tangible or identifiable intangible assets; only employee-owners own the company; sales largely depend on employee-owner’s personal relationships with customers; and product and/or services know-how and supplier relationships rest primarily with employee-owner.

It is hard to imagine many businesses where personal goodwill truly exists. One more reason having a prenuptial (or postnuptial) agreement is so important.

"The Entrepreneur’s Guide to Divorce; Part Two,"&nbsp;by Michelle Gervais was published in&nbsp;<a href="https://misc.pagesuite.com/pdfdownload/b715e405-e891-4931-bff9-a3271a4bd55a.pdf">Tampa Bay Business &amp; Wealth Magazine</a>&nbsp;on December 3, 2024.

Michelle M. Gervais

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The Entrepreneur’s Guide to Divorce; Part Two

<a href="https://www.blankrome.com/news-and-events/entrepreneurs-guide-divorce-part-one/">The Entrepreneur’s Guide to Divorce; Part One</a>

The Entrepreneur’s Guide to Divorce; Part Two

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The Entrepreneur’s Guide to Divorce; Part Two

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