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Business Goodwill and Divorce

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Business Goodwill and Divorce

Asset division is at the heart of the matter in the financial segment of a divorce. The distribution of marital assets between the spouses largely determines their financial stability and economic future. 

Businesses are some of the most pivotal assets considered by the court. How those businesses are valued directly influences the distribution. A key component of business asset division is goodwill. 

What is Goodwill?

Goodwill is a complex area of valuation that hinges on unseeable worth. In general, a business's goodwill is its value above and beyond the fair market value. Goodwill is comprised of the business' brand (which includes reputation, identity, and recognition), its customer base, the management approach, as well as more tangible items such as proprietary formulas, technology, and systems. These items increase the value of the company beyond its visible assets and receivables. 

An excellent example of this is Toyota. The company had tremendous goodwill before its delayed response to the gas pedal malfunction in its vehicles. This PR disaster could have destroyed the company, but Toyota had such positive goodwill that it has mostly rebounded from this crisis. That kind of goodwill is difficult to pinpoint, isolate, and value, but it has an enormous worth and frequently is essential to a company's stability and growth. 

When a business is valued in a divorce, its worth must be entirely and thoroughly assessed. Goodwill must be a critical part of this valuation. If goodwill is not considered, the company will be distinctly undervalued. An undervaluation is advantageous for the moneyed spouse who will likely continue to own the company after the divorce. However, the spouse who will be bought out of the company needs the valuation to be thorough and all-encompassing to ensure they are compensated for the true value of the company. 

Enterprise Goodwill vs. Personal Goodwill

There are two important types of goodwill involved in a business. Enterprise goodwill is the type described above, attaching to the actual business itself and remaining inherent in its makeup. Enterprise goodwill cannot be separated out from the business. Personal goodwill is the other crucial kind of goodwill that is critical to the valuation of a business. Personal goodwill stems from a singular person who is the owner of the business or a professional with a practice that either makes up the entire business or creates a distinct value for their role in the business. 

Personal goodwill is based on that particular person's reputation, experience, and network in that specific industry or realm of business. A book of business and contacts are important elements of personal goodwill. An indication that there is important personal goodwill is the presence of a non-compete clause. This signals that this person has some intrinsic value that is not contained within the company itself and that they take wherever they go. 

Personal goodwill is evident in this example. Two insurance companies operate in the same city. Excel Insurance is located on a busy corner and has lots of billboards advertising their low rates. They do a lot of business online when people reach out for a rate comparison. Roger has owned Smith Insurance for 30 years. Roger is active in the chamber of commerce, charitable causes, and belongs to several clubs. He is well-known in the business community, hosts fundraisers for children's cancer, and works closely with noted CEOs. Smith Insurance's value is tied to the owner's personal goodwill. His contacts, activity, history, experience, and network have made that insurance agency what it is. 

The two companies might have similar assets and receivables. However, Smith Insurance has an additional value stemming from him personally. Excel Insurance has enterprise goodwill, formed by their advertising and word of mouth about their low rates. The goodwill is not associated with anyone in particular who works there.

To distinguish between personal and enterprise goodwill, the court will consider a variety of factors:

  • The size of the business. A large organizational structure is more likely to have enterprise goodwill. A small business, or a distinct professional within a large business (such as a lawyer at a large firm) is likely to have personal goodwill.
  • The nature of the business. A business with a heavy emphasis on personal service is likely to have personal goodwill. 
  • Ownership. An employee-owned business is likely to have significant personal goodwill. A large number of employees signals enterprise goodwill is more likely. 
  • Generation of sales. If sales are generated based on name recognition and personal relationships with one person, personal goodwill exists. If business results from recognition of the company's name and the sales team’s activities, then enterprise goodwill is likely.
  • Capital investments. A significant amount of capital investment signals there is enterprise goodwill.
  • A non-compete clause. The existence of a non-compete indicates there is personal goodwill vested within one individual who is the owner or employee of the business.
  • Personal knowledge. If the company hinges on the personal knowledge, skills, relationships, and know-how of one person, there is personal goodwill. Enterprise goodwill is likely if there are large-scale production methods, intellectual property, and business systems. 

Marital Distribution and Goodwill

The purpose of calculating a business's value during a divorce is to determine the full worth of all of the marital assets. In a divorce, New York distributes marital assets in a way that is fair, but not necessarily 50/50. A common misconception is that assets are split in half, so if there is a business, some believe it will be divided between the couple. 

In fact, it's quite rare for this to happen, particularly when the couple has a high net worth. Instead, the court calculates the value of all the assets they own, including the value of any businesses and the goodwill attached to that business or the spouses themselves. 

The court then determines how much of that total worth each person is entitled to. The assets are then assigned to the spouses. Most commonly, the spouse who owns the business or who has worked in the business is most likely to become the sole owner when it comes to a business. The other spouse is essentially bought out of their interest by being assigned other property – such as investment accounts, homes, or other valuable items. 

If a business, with its goodwill, is valued at $20 million, Spouse A may keep the business. In comparison, Spouse B receives a home valued at $10 million, a vacation property valued at $5 million, and stocks valued at $5 million. 

Careful valuation of all aspects of businesses will result in a robust and fair assessment and division of the value of marital assets in your case.

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Dror Bikel

Dror Bikel is a Manhattan-based divorce and child custody lawyer. He founded and leads Bikel and Schanfield, New York’s best-known firm for high-conflict matrimonial disputes.

As founding partner of the Manhattan-based firm, Bikel & Schanfield, LLP, Dror Bikel’s 20+ years of trial and litigation experience offers invaluable insight in facilitating settlements, mediating disputes and obtaining superior results for his clients. A recipient of the New York Super Lawyers Award, Mr. Bikel is voted among the Top 5% New York State Family Law Attorneys.

To connect with Dror: 212.682.6222 or [hidden email] or online
To learn more about Dror Bikel: drorbikel.com
To learn more about Dror's book The 1% Divorce: When Titans Clashsuttonhart.com

For media inquiries or speaking engagements: [hidden email]



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