Brett R. Turner, Senior Attorney, National Legal Research Group
The goodwill of a business is the difference between the total net value of its tangible assets and liabilities and its total value when sold on the market as an ongoing concern. For purposes of equitable distribution, there are two different types of goodwill. Enterprise goodwill resides in the business entity and can be transferred to another owner when the business is sold. Individual goodwill resides in the owner individually and is indistinguishable from his or her personal reputation. The strong general rule is that enterprise goodwill is marital property to the extent acquired during the marriage. Individual goodwill, however, is generally separate property.
The distinction between enterprise and individual goodwill is particularly relevant in valuing small professional practices. These practices tend to depend heavily upon the personal reputation of the professional and therefore often have significant individual goodwill. But there is no logical reason why a professional practice cannot also have enterprise goodwill if customers are attracted by such transferable factors as a trade name, a convenient physical location, or enterprise-level marketing.
A good demonstration is Miller v. Miller, Nos. S10F1703, S10A1707, 2010 WL 4704326 (Ga. Nov. 22, 2010). The husband in Miller operated a solo medical practice. The trial court held that the practice had both enterprise and individual goodwill, and treated the enterprise goodwill as marital property. The husband appealed.
The husband tried to define the issue as whether professional goodwill was marital property, but the court saw through this argument, realizing that professional goodwill can be either enterprise or individual. Citing 2 Brett R. Turner, Equitable Distribution of Property §§ 6:73–6:74 (3d ed. 2005), the court held that enterprise goodwill is marital property and assumed without deciding that individual goodwill is separate property.
Two witnesses called by the husband testified that there was no market for small medical practices, and if that were true, the husband's goodwill would have been entirely individual. But the trial court relied upon the testimony of the wife's expert, who testified based upon national databases that some of the goodwill was enterprise goodwill. The husband argued that the national data was irrelevant, but "differences in geographical locations and dates of sale go to the weight, rather than admissibility, of the comparable sales on which Wife's expert relied." 2010 WL 4704326, at *2. Significantly, the expert valuation included an express adjustment to remove individual goodwill, a fact which helped reassure the courts that the expert had not broadly treated individual goodwill as enterprise goodwill.
The wife's expert also relied upon the capitalization of excess earnings method, which is probably the method most commonly used to value professional goodwill. The method values goodwill as a function of excess earnings—actual earnings minus the average earnings for a similar professional. The husband argued that he could not have any goodwill, because he paid himself only an average salary. The court disagreed, finding that the issue was the earnings of the practice and not the salary of the owner, which is subject to manipulation. Salary aside, the earnings of the practice as a whole were greater than average.
For a complete review of nationwide case law on the distinction between enterprise and individual goodwill, see Brett R. Turner, Classification and Division of Business and Professional Goodwill, 20 Divorce Litig. 1 (Feb. 2010). That article is available for $75 from the Divorce Litigation website, http://www.nlrg.com/lawlet/divorcelit.php.
