Classification, Valuation, and Division of Business Goodwill

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When valuing a business for purposes of division upon divorce, all states agree that the hard assets and liabilities of the business are marital property. But the value of a business as an ongoing concern is often greater than the total value of its assets and liabilities. This difference in value is known as goodwill. Most states recognize two different types of goodwill. Enterprise goodwill is based upon the reputation and trade name of the business itself. Because it is tied to the business, enterprise goodwill can generally be realized through sale on the open market. Indeed, marketable businesses are often sold for a sale price greater than the total value of their tangible assets. Because enterprise goodwill is marketable, most states consider it to be a valid element of value for purposes of division upon divorce. Individual goodwill is not tied to the business but, rather, arises from the personal reputations of the owners. It is most often seen in smaller businesses, and especially in small professional practices. Individual goodwill generally cannot be sold, at least not without a covenant not to compete, for it follows the individual and not the business entity. Because personal reputation is generally not marital property, individual goodwill is not a valid element of value in a majority of states. Distinguishing between enterprise and individual goodwill is one of the most difficult tasks of dividing a business in a divorce case. This 20-page White Paper discusses case law from a large number of states on how the distinction should be drawn and on the extent to which the goodwill of a specific business is enterprise or individual. Included as an appendix is a list of the nationwide cases addressing this issue, sorted by the type of business involved, so that readers can easily focus upon cases involving similar businesses. The cost of this White Paper is $75.