Unscrambling the Distinctions: Enterprise Goodwill and Personal Goodwill in Divorce

Introduction

In the context of divorce, the equitable division of assets can be a complex and contentious issue. Without a doubt, the division of small business fits squarely in the complex and often contentious areas of equitable division. One often-overlooked aspect is the valuation and classification of intangible assets. This post aims to clarify the differences between enterprise goodwill and personal goodwill, and their implications in divorce proceedings.

Before one can dive into what is the difference between enterprise goodwill and personal goodwill, one must have an idea of what goodwill is at its basic level. So, when a business is bought and sold, its fair market value is normally more than just the assets it owns minus the liabilities it carries…that is goodwill. However, why that business is worth more than its assets minus liabilities is important. Value can sometimes be linked to “things” that can be transferred from one owner to the next, things such as business reputation, location, client base, name recognition, etc., and sometimes its linked to “things” that can’t be transferred at all. In other words, some of these “things” are inextricably linked to business itself and others are linked to the person that owns the business. There are businesses out there that would be equally as valuable without the owner, while on the other hand, there are businesses out there that would be worth nothing without the owner and what he or she brings to the table. That is where the concepts of enterprise goodwill and personal goodwill meet. South Carolina courts recognize two types of goodwill:

Enterprise Goodwill

Enterprise goodwill refers to the inherent value of a business as a thriving entity, encompassing its reputation, customer base, and market position. This type of goodwill is inseparable from the business itself and is not attributed to any individual. Enterprise goodwill is that which exists independently of one’s personal efforts and will outlast one’s involvement with the business. In re Marriage of Alexander,  386 Ill. App. 3d 192, 857 N.E. 2d 766, 769, 306 Ill. Dec. 367 (Ill. App. Ct. 2006).

Personal Goodwill

In contrast, personal goodwill is associated with individuals. Personal goodwill refers to the individual’s reputation, skills, and relationships that contribute to their personal earning capacity. This type of goodwill is entirely attributed to the individual and is not attached to the business.

Implications in Divorce

In divorce proceedings, the classification of goodwill as enterprise or personal can significantly impact its treatment in asset division. Generally:

– Enterprise goodwill is considered a marital asset, subject to equitable division.

– Personal goodwill is typically considered separate property, not subject to division.

What this all means is that a million-dollar business, isn’t always a million-dollar business. When spouses are fighting about what a business is worth, the courts have the authority to declare portions of the business’s value as enterprise goodwill or personal goodwill. If a business would be perfectly operational and profitable without the owner, then it’s much more valuable than a small business that would be worth nothing if the owner quit, died, or if the business was sold.

Some law firms are perfect examples of this. If solo practitioner were going through a divorce and the court was asked to analyze his or her law firm’s value, the court could conclude that the practice is worth a million dollars, but because the majority of the value of the business is inextricably linked to the person…the lawyer…then what gets divided in a divorce is, unfortunately for the other spouse, very little. On the other hand, if the court concluded that the value of the business was linked to something that could be transferred to the new owner, like the location of the practice, its current client base, or other tangible “things”, then what gets divided between the spouses could be significant.

Conclusion

In conclusion, understanding the distinctions between enterprise and personal goodwill is crucial in divorce cases involving businesses or professional practices. Accurate classification can significantly impact asset division, and it is essential for parties to seek legal advice to ensure a fair and equitable outcome.

Please note that this is a general overview and not a substitute for legal advice. Consult with a family law attorney at Bannister, Wyatt, and Stalvey, LLC for specific guidance on your situation. 864.298.0084