Goodwill Makes Valuing a Family Business Difficult

Valuing a family business can be one of the most difficult aspects of a divorce settlement. Family businesses – which include closely held corporations, single-proprietorships, private companies without publicly traded stock – must be valued by experts who use different methods to place a value on the business. Many factors make this calculation difficult and subject to dispute.

The valuation of a family business can become explosive because emotional attachments. One spouse may be far more emotionally attached to a business he or she conceived and built. In some cases, part of the value of the business may be separate property and the remainder marital property, as in the case where there was an established business when he or she married.

Goodwill – which has been called “the reward the market places on an enterprise for being up and running” – makes the valuation and division even more difficult. More than half of the jurisdictions distinguish between what is called “enterprise goodwill” and what is called “personal goodwill.” The former, which is also called “business goodwill,” is part of “the business itself and can include brand names, accessible locations and an assembled workforce”; the latter “is a function of an owner’s reputation, skills and personal efforts and can’t easily be transferred.”

Some courts have ruled against crediting the dependent spouse with a company’s personal goodwill and then award maintenance payments based on future earnings. Personal goodwill is specifically excluded from the marital estate because it is a spouse’s future earnings capacity, but enterprise goodwill is included.

Goodwill is often very problematic in divorce settlements involving professional corporations, such as doctors. But goodwill can also come into play for craftsmen, such as a shoemaker whose reputation and good work far transcend the material value of the tools and equipment in his one-man operation.

In a divorce, the spouses should remember that professional help valuing a family business results in a fairer and more accurate appraisal.

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