Evaluating the Goodwill of a Business During Divorce

EVALUATING THE GOODWILL OF A BUSINESS DURING DIVORCE

Divorce is never easy. If one or both spouses own a business interest, however, it can complicate the legal process of dissolution quickly. Generally, the valuation of a business is the most complicated and factually unique part of a high-asset divorce.There are any number of possible outcomes in a divorce with business ownership as martial property. For example, one spouse may give up interest in the business in exchange for alimony. Or both spouses may continue to run the business after divorce. One spouse may agree to a minority stake in the business in lieu of alimony. One option is not necessarily better than the other; in all cases, however, the value of the business must first be established in order to determine what is appropriate.The full range of possibilities regarding business valuation and division in divorce is extensive and beyond the scope of this article. Rather, below the reader will find a brief overview of one way to value a service business that receives much of its income from personal goodwill to customers.

Valuation basics

The value of a business includes both tangible and intangible assets. Tangible assets require due diligence and investigation, but can be relatively simpler to value. Tangible assets are things like revenue stream and equipment used to run the business. Intangible assets, on the other hand, can be harder to quantify. A large portion of a business’ intangible assets includes “goodwill”. Goodwill is the characteristics of a business – whether the name brand or an individual owner – that bring in new and returning customers.

Double dipping

If a significant portion of the value of a business is in personal goodwill, then there may be issues regarding “double dipping.” For example, the sole owner of a business may bring a significant amount of personal goodwill to the business – the assurance that he or she will do a good job performing the duties of the business. In such a case, the owner’s contribution to the business is not transferable. This is “personal goodwill.” A problem in divorce may arise when the business owner’s income stream is used to determine spousal support and also used to value the business. The owner is getting hit twice, once based on personal income from the business, and second from the business being valued higher because of his or her personal goodwill contribution. If personal goodwill is excluded from the value of the business, however, then the owner is not subject to double dipping.

There are several ways to determine if a business is largely valuable based on personal goodwill. Value based on personal goodwill could include:

  • The experience, skill and reputation of the individual owner.
  • Lost revenue stream if one ex-spouse does not continue to operate the business after the divorce.
  • The inability to attract new customers and referrals apart from the persona of the individual.

Getting experienced help in valuation and divorce

Divorce is a significant life event even absent the financial ramifications of living separate financial lives. When a business is at stake in divorce, the last thing a soon-to-be ex spouse wants is to struggle financially and in business. Business owners in Tennessee considering divorce or in divorce proceedings should contact a skilled family law attorney familiar with business valuation to discuss potential options and next steps.

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