One of the most hotly contested issues in many divorces is the value of one spouse’s business – and how much of that value should be divided between the spouses in equitable distribution. This is a significant issue for many of our small- to medium-sized business clients, such as construction companies, medical and dental practices, retail and car dealerships, and professional service businesses. However, it also applies to larger businesses with multiple shareholders. One of the issues that the divorce attorney must consider is the legal distinction between “professional goodwill” (also called “personal” goodwill) and “enterprise goodwill.” In Florida, only enterprise goodwill is subject to equitable distribution. Professional goodwill, on the other hand, should be excluded from the valuation expert’s analysis. The basis for this distinction turns on the valuation standard that Florida courts look to when determining the value of a business, which is “fair market value.”
Generally, a business’s value is based on the net value of its “hard assets” such as real estate, cash on hand, accounts receivable, equipment and inventory plus “goodwill.” “Goodwill” is generally identified as non-identifiable intangible items such as customer relationships, employee morale and training, efficient operations, and branding. In Florida dissolution of marriage cases, goodwill has been referred to as the expectation of continued public patronage. Typically, “enterprise goodwill” is a marital asset that should be equitably divided if it developed during the marriage and it exists separate and apart from the owner-spouse’s reputation and continued involvement. However, if the business’s goodwill exists because of the continued presence and reputation of the owner-spouse, then it should be deemed “professional goodwill” and its value excluded from the equitable distribution analysis.
The Florida Supreme Court has made clear that the exclusive method for valuing a spouse’s business in divorce proceedings is fair market value. Typically, fair market value measures the value of the business’s net assets plus the value of goodwill. While it is proper to equitably divide the marital portion of the business’s “enterprise goodwill”, the “professional goodwill” should be carved out of the equitable distribution analysis. Therefore, business owners contemplating divorce, should hire a divorce attorney who is familiar with that distinction. The failure to recognize the distinction between professional and enterprise goodwill could result in a very significant windfall to the business owner’s spouse.
Matthew Vaughn graduated from Vanderbilt University in 2003. He received his Master’s Degree in Business Administration in Finance from the University of Florida in 2007, and obtained his law degree also from University of Florida in 2011. His practice includes complex divorce proceedings with particular emphasis on the valuation of business interests.