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Goodwill in divorce business valuations · Family Law Talk

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  Speaker 1: Welcome to Family Law Talk. Familylaw Talk presented by Kirk
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  Stangy of Stangy Lawfirm PC. Stangy Law Firm is a
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  multi state family law firm. Now here's your host, Kirk Stangy.
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  Speaker 2: Welcome to Family Law Talk. We have an interesting topic today.
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  The topic is goodwill and divorce business valuations. And this
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  episode today is based on an article on our blog
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  famal Lawheadquarters dot com and the title of the article
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  is the Importance of Goodwill and Business Valuations. The date
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  of the article is December sixth, twenty twenty four, so
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  it was a follow up to the episode today. Go
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  on over to Familawheadquarters dot com and read this article.
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  It'll give you more information on this topic. Okay, but
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  let's go ahead and jump on in. When parties are
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  divorcing and there's a business interest, this can very much
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  complicate a divorce, It really can. I mean. The issue
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  is this is that in dividing marital property and debt,
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  the court's got to know the value of all the
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  marital assets. So if there's a business interest, whether an
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  individual is the majority owner or a minority owner, and
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  if it was formed during marriage, so it's a marital asset.
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  Valuating the business can be a big, big piece in
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  terms of resolving a divorce case, whether it be through settlement,
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  whether it be through trial, because again you've got to
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  know what the business is worth in order to divide
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  the business itself and other marital assets. All Right, So
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  in a good chunk of cases, what ends up happening is,
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  and this would be the litigated cases where the parties
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  don't agree, both parties end up hiring their own business valuator. Right,
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  So husband has a business valuator, wife has a business valuator.
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  And these individuals are typically forensic accountants. They have other
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  credentials almost always where they have a background, and they
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  have some training in terms of doing business valuations. What
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  you end up seeing in these cases is oftentimes evaluations
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  can be close, but in other cases they can be
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  very much far apart. And then what ends up having
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  to happen is that if the case is tried, the
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  judge is going to have to rely, you know, on
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  one of the business valuators valuation and find it more credible.
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  Typically Okay, in settlement, it's possible the parties could go
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  somewhere in the middle, you know, they could reach an
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  agreement that you know, the valuation is somewhere in the
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  middle between the two valuators assessment of the value of
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  this business interest. You know know this as well, that
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  you know, sometimes valuations can be very much far apart.
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  Sometimes they can be close. But in a lot of cases,
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  you know, we could be talking six figures or millions
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  of dollars apart in terms of the overall valuation, which
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  could make again the case much more complex. Now, you know,
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  to get in the weeds a little bit more. When
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  you're looking at the value of a business interest, what
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  you're typically looking for is what's called the fair market value.
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  So what would a willing buyer in a hypothetical market
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  pay for this business interest? Okay, And so this is
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  where valuation experts can have wildly different opinions. In some cases,
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  business valuators will look at the income streams and they
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  will do the income approach to valuation. In other cases,
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  where there's a lot of assets that the business owns,
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  the business valuator may do the asset approach okay, But
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  far more common is what's called the fair market value approach,
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  where what's you know, what business valuators are looking to
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  find is what would a buyer pay for this business interest? Okay?
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  And so then you know, take this concept of goodwill
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  and how does this translate into business valuations? I would
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  tell you know, all the listeners. You know, first of all,
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  we're not talking about the store goodwill, right, We're not
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  talking about the second hand store where people buy you know,
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  used items. When we're talking about goodwill. There's two different
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  types that courts differentiate between, all right. The first type
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  is personal goodwill, and this attaches to a particular person
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  who's a key part of the business itself. And you know,
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  think medical practice where there's a doctor that patients come
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  to see and that you know, many patients may leave
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  if that doctor departed. Think a law firm where there's
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  a lawyer that the clients particularly are attracted to they
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  want to have represent them, okay, And if that lawyer
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  wasn't there, the clients wouldn't come or they might depart.
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  It could be an accounting practice, could be various other
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  types of small businesses where there's a key person that
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  the consumers, the customers trust and know and like and respect,
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  and if that person wasn't there, you know, the customers
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  of the clients wouldn't come or they wouldn't stay. Okay,
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  that's personal good will. Contrast that with enterprise goodwill. Enterprise
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  goodwill generally occurs with larger corporations with a well known brand. Okay,
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  So think major shoe companies, Think major electronic companies, where
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  you know, it doesn't matter who is running the corporation.
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  People just know that particular corporation. Think major stores right
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  where lots of individuals maybe don't even know who the
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  CEO of the company is or something like that. Okay,
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  this is enterprise goodwill. These are big, big corporations. So
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  the bigger the company, the more likely there is to
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  be enterprise goodwill. The smaller the company, the more likely.
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  We're talking personal goodwill. Okay. And so how does good
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  will work with business valuations? Well, this is really thorny, okay,
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  And it's going to vary based on the state in
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  which your case is located. So for the listeners, definitely
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  speak with a lawyer who's licensed and competent to practice
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  law and your jurisdiction. The reality is some states exclude
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  goodwill from the maryal of state, and they don't make
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  it divisible in the divorce itself. Okay. Last time I checked,
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  this was twenty four states. Nineteen states do include personal
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  goodwill in the maryal of state. Okay, So if you're
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  a business owner and the customers and the clients really
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  like you and they come because of you, sort of
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  bad news if you're in one of these states, but
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  the personal goodwill is included. Okay. Eight states have no
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  real formal precedent. Thus it's really uncertain these states, you
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  know what a court may or may not do. Okay,
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  But again it's important to know are you in a
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  state where goodwill is considered in the mayoral of state
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  or whether you're in a state where that's not the case. Okay,
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  But the reality is if you're in a state where
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  it is included in the mayoral of state, what you
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  want to be thinking about is, Look, let's suppose the
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  buyer pays very little for the business due to expected
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  losses of repeat customers or civic referrals to the newly
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  formed competing entity. In other words, Look, if there's a
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  lot of personal goodwill and this person's going to be
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  departing the company and the divorce, let's say, you know,
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  this can drive down the value of the business because
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  of that individual's specific personal goodwill. Right again, think a doctor,
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  think a lawyer, think an account and think somebody else
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  who's very well known in a business who customers come
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  because of that particular individual. Okay. And so in cases
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  where if a person leaves, the price of the business
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  really goes down, then look, personal goodwill is going to
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  be a thing in that divorce, assuming that you know,
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  it's a state where it's included in the marrioral of
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  state in terms of property and debt division. Okay, you know,
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  so you know that's a really important piece and something
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  to definitely keep in mind. Okay, in instances where an
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  individual departs the entity too. I mean it's possible that
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  clients leave and go with this individual, right or they
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  could be posted and go with this individual. Obviously, you know,
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  this can be thorny and can result in all kinds
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  of various you know, legal and potential ethical issues. But
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  if if somebody departs in the customers are just going
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  to depart with that person, that that points to a
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  large amount of personal goodwill, okay, And it could even
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  be loyalty from the other employees. You know, other employees
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  leave and depart and they want to go with this
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  person again in those circumstances, lots of personal goodwill in
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  those circumstances. And again then it's a circumstance of you know,
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  how do you value that and is it included in
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  the maryal of state or is it not included in
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  the mayoral estate? Okay, very important, all right. And so
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  then when you get into arguments about whether or not
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  goodwill should be included in the mayor a state for
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  purposes of business valuations, and again we're talking particularly about
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  that personal goodwill. Right, So if one of the divorcing
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  litigants has personal goodwill in the business itself, okay, you know,
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  the common argument for including goodwill the fair market value
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  is that otherwise the court's really ignoring the contributions of
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  the non professional spouse to the creation of the professional
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  spouse's business, earning capacity and career. All right. On the
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  flip end, arguments against including goodwill or that it's highly speculative,
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  it's really hard to put a value to it. It
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  results in inflated values, and it requires that the professional
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  spouse compensate the non professional spouse for earnings they may
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  never even acquire. Okay, So that's what can make it
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  really murky in terms of whether this should be included,
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  whether it shouldn't be included, or whatnot. But definitely an interesting,
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  interesting topic. Okay, so again the topic today is goodwill
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  in business valuations. It's definitely an interesting topic. It's definitely
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  one you want to be thinking about again. As a
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  follow up to the episode today, going over to Familylawheadquarters
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  dot com read the article title the Importance of Goodwill
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  in Business Valuations. But listen. Thanks for tuning in today,
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  stay tuned to our next episode coming up on Family
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  Law Talk. Thank you very much.
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  Speaker 1: Thank you for listening to Family Law Talk with Kirk Stangy.
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