Disputes over the value of assets are common in marital dissolution cases — and the existence of intangible business assets only complicates matters. Business assets are classified one of two ways: 1) tangible (or hard) assets, including such items as cash, receivables and equipment, which typically are recorded on a company’s balance sheet; and 2) intangible assets, which are valued as the difference between fair market value and net tangible value.
Often, divorce courts lump all intangible value into a catchall phrase called “goodwill.” Goodwill may include other identifiable intangible assets, such as patents, customer lists, brands and proprietary software. But there’s little consensus among U.S. courts on how goodwill should be valued in divorce cases.
How courts view goodwill
Generally, U.S. courts view goodwill in one of three ways. The first is the majority view. More than half of the states differentiate between enterprise and personal goodwill (next page). Personal goodwill is specifically excluded from the marital estate, but enterprise goodwill is included.
The second most common treatment is the all-inclusive view, which includes all business value in the marital estate. It makes no distinction between enterprise and personal goodwill.
The third and least common is the material view, which excludes all goodwill from the marital estate. Here, appraisers separate value into tangible and intangible components, but they don’t analyze it further.
A handful of states have yet to take sides, and others have made inconsistent rulings on goodwill. Although goodwill is generally associated with professional practices, some states have ruled that other types of businesses, such as auto dealerships, also possess it.
Enterprise vs. personal goodwill
In states that hold the majority view, courts generally relegate goodwill to one of two categories:
Enterprise. Also called business goodwill, this is linked to the business itself and can include brand names, accessible locations and an assembled workforce.
Personal. This is a function of an owner’s reputation, skills and personal efforts and can’t easily be transferred. The logic behind excluding personal goodwill is that it represents a spouse’s future earnings capacity. Some courts have determined it’s unfair to credit a nonmonied spouse for a company’s personal goodwill and then award maintenance payments based on future earnings.
Include or exclude?
The degree to which goodwill is included or excluded from a business’s value can significantly affect a marital settlement. And it can be difficult to predict the outcome in states where precedent hasn’t yet been set. Take the 2009 Kentucky case Gaskill v. Robbins.
The wife (Gaskill) was an established oral surgeon. Using the cost approach, Gaskill’s expert appraised the business at about $220,000 and no value was attributed to goodwill. Robbins’ expert averaged four methods to arrive at a value of $670,000, including goodwill and assuming a noncompete agreement.
The trial court accepted Robbins’ value, because prior case law didn’t differentiate enterprise and personal goodwill. Gaskill appealed, arguing that personal goodwill was nontransferable and, therefore, should be excluded from the marital estate. The appellate court agreed with Gaskill, citing case law outside of Kentucky, such as May v. May in West Virginia and Yoon v. Yoon in Indiana.
When the case went before the Kentucky Supreme Court, the court likened personal goodwill to an advanced professional degree, which isn’t marital property in Kentucky, and stated that personal goodwill belongs exclusively to the practitioner. The court remanded the case to the trial court to revalue Gaskill’s practice and to exclude personal goodwill from the marital estate.
Material impact
Professional valuation expertise is essential when a divorce case involves goodwill. An expert’s input regarding legal precedent, jurisdictional differences and the theory underlying goodwill allocations can have a material impact on the fair division of assets.
Issue 3 - Spring 2011