As you may be aware, one of the frequent issues before the family court is equitable division, which is the process of identifying marital assets and debts and apportioning them appropriately to the various parties. One issue that has recently been addressed by the South Carolina Supreme Court is distinguishing between personal goodwill and enterprise goodwill. Why does it matter? Personal goodwill is not subject to equitable division, while enterprise goodwill is.
Goodwill is recognized as the quantifiable asset (the monetary value) of the established reputation of a business. It is represented by the excess of the price paid for a business over its fair market value. . In a divorce, the goodwill of a family-owned business will be evaluated in order to divide the value of the business in an equitable manner. Bear in mind, of course, that “equitable” means “fair,” but not necessarily “equal.”
What the Law Says
The law in South Carolina defines enterprise goodwill and personal goodwill as follows:
Enterprise goodwill is that which exists independently of one’s personal efforts and will outlast one’s involvement with the business. Enterprise goodwill is based on the intangible, but generally marketable, existence in a business of established relations with employees, customers and suppliers. Enterprise goodwill attaches to a business entity and is associated separately from the reputation of the owners. The asset has a determinable value because the enterprise goodwill of an ongoing business will transfer upon sale of the business to a willing buyer.
Personal goodwill is associated with individuals. It is that part of increased earning capacity that results from the reputation, knowledge and skills of individual people. The implied assumption is that if the individual were not there, the clients would go elsewhere. Accordingly, the goodwill of a service business, such as a professional practice, consists largely of personal goodwill. Any value that attaches to a business as a result of this personal goodwill represents nothing more than the future earning capacity of the individual and is not divisible in a divorce proceeding. In the family court setting, future earning capacity based on a spouse’s reputation, knowledge and skills—personal goodwill—is considered nonmarketable and thus not property subject to division.
Valuing Goodwill in the Courtroom
As you can see, if a business is part of the marital estate, the identification of goodwill as personal or enterprise may have grave implications—depending on which side of the courtroom you are sitting. A one-million-dollar marital business asset that includes enterprise goodwill in the amount of $300,000 (assuming no personal goodwill) is, for the purposes of equitable division in the family court, worth one million dollars. If that business had no enterprise goodwill but, instead, $300,000 worth of personal goodwill attached to one of the parties of the divorce, for the sake of equitable division it is a $700,000 asset.
Our state Supreme Court went further in offering guidance to the family court judges and family court attorneys in South Carolina, by providing a list of indicators, not meant to be exhaustive, to help determine if goodwill is personal or enterprise:
Personal Goodwill Indicators
- Small entrepreneurial business highly dependent on employee owner's personal skills and relationships.
- No employment agreement between company and employee owner.
- Personal service is an important selling feature in the company’s product or services.
- No significant capital investment in either in either tangible or identifiable tangible assets.
- Only employee-owners own the company.
- Sales largely depend on the employee-owner's personal employees.
- Product and/or services know-how and supplier relationships rest primarily with the employee-owner.
Enterprise Goodwill Indicators
- Larger business, which has formalized its organizational structures and institutionalized its systems and controls.
- Owner-employee has employment agreement with company.
- The business is not heavily dependent on personal services.
- The business has significant capital investments in either tangible or identifiable intangible assets.
- The company has more than one owner, some of whom are not employees.
- Company sales result from name recognition, sales force, sales contracts and other company-owned intangibles.
- Company has supplier contracts and formalized production methods, patents, copyrights, business systems, etc.
Divorce is complicated. If you are faced with a divorce and part of your marital estate is a business, it’s important to have good representation to protect your interest. Good lawyers can help properly present evidence that support business valuation. If you are faced with a family court matter and wish to discuss it with the lawyers at Holland & Usry, please contact us toll-free at 888.230.1841 for a confidential consultation.