Many issues need to be settled in a divorce, including the division of both spouses' assets. In the case one or both partners own a business, dividing and valuing goodwill can be a complex and sensitive issue. Goodwill represents the intangible value of a business, such as reputation, customer base and other non-tangible assets. This article discusses the key aspects of dividing and valuing goodwill in divorce cases and the important role lawyers can play in this regard.
Definition of Goodwill
Goodwill is an abstract value representing a company's intangible assets. It includes elements such as the company's reputation, customer base, brand, employee loyalty and other factors that contribute to the company's profitability. It represents the company's ability to generate profits in the future, or, in other words, a company's profit-earning capacity. Determining the exact value of goodwill can be challenging as it is not directly measurable. But in a divorce, the value of goodwill is indeed relevant to the division of assets between the two spouses.
Relevant legal considerations
In divorce cases, goodwill is considered part of the assets to be divided between the spouses. It is important to note that the way goodwill is handled within a divorce situation can vary. Much depends on the specific circumstances of the case. Similarly, it is important to distinguish between business goodwill and personal goodwill. Business goodwill and personal goodwill are two different forms of goodwill that can occur within a business. The main difference between the two is how they are associated with the business and the individuals operating in it. Let's have a look at each type of goodwill, by using examples:
Business goodwill
Business goodwill refers to the value associated with the business itself, independent of the individuals involved in it. It is based on factors such as the company's reputation, customer base, brand name and other intangible assets. Business goodwill is retained even if there are changes in the ownership or management structure of the company.
Example: A restaurant with an excellent reputation and an established customer base has business goodwill. Customers come to the restaurant because of the quality of the food, the service and the overall experience. Even if the owner of the restaurant changes, the goodwill can be maintained because it is associated with the name and reputation of the restaurant itself.
Personal goodwill
Personal goodwill, on the other hand, is directly associated with the individual person or persons involved in the business. It refers to the value derived from a person's specific skills, expertise, relationships or reputation. Personal goodwill is highly dependent on that person's active involvement in the business and can be lost if that person leaves the business.
Example: A celebrity who uses her name and image to promote a clothing line has personal goodwill. Customers associate the clothing line with the celebrity's fame and personal style. If the celebrity decides to withdraw from the business and her name is no longer associated with the clothing line, the personal goodwill may be lost.
It is important to understand the distinction between business goodwill and personal goodwill because it can affect issues such as the valuation of the business, the division of assets in a divorce or the sale of the business. Personal goodwill, for example, is usually not divided in a divorce unless specific agreements have been made in, for example, prenuptial agreements. In legal matters, it is advisable to consult the expertise of a lawyer to ensure the proper treatment and valuation of both forms of goodwill.
Valuation methods
Valuing goodwill is a complicated process that requires specific expertise. There are several methods that can be applied, such as the income approach, comparison method and cost approach. The income approach considers the company's future profit expectations. The comparison method considers comparable companies in the market, while the cost approach measures the cost of building a comparable company. It is important to select the right valuation method based on the specific situation of the divorcing entrepreneur.
Expert report
It is usually advisable to hire an independent expert to determine the value of goodwill. This expert will conduct a thorough investigation of the business, analyse financial data and consider the relevant factors to make an objective valuation. I can help you select a suitable expert and ensure that your interests are properly represented.
Expertise of lawyers
In divorce cases involving goodwill, it is advisable to engage the expertise of an experienced lawyer. A lawyer with knowledge of family law and experience in entrepreneurial divorce proceedings can protect your interests. They can advise on the valuation methods best suited to the specific situation and can negotiate a fair division of goodwill.
Negotiation and court proceedings
In divorce cases, it is sometimes possible to reach an agreement on the valuation and distribution of goodwill through negotiation. If this is not possible, the case can be taken to court. The judge will usually appoint an expert to assess the value of goodwill. A specialised divorce lawyer can represent his or her client in the negotiations but also if necessary in the court proceedings and present arguments to convince the court of a fair valuation and division of goodwill (if any).
Conclusion
In the case of divorces involving a business, the valuation and distribution of goodwill (and arguing whether or not goodwill exists), is a crucial issue. It requires a deep understanding of both legal and financial/business aspects. It is essential to use the right valuation methods and hire an experienced lawyer to represent your interests.
Contact Mrs Angelique van den Eshoff, specialised family lawyer at SPEE advocaten & mediation, for expert advice and support in your divorce case. She is a highly experienced lawyer with expertise in family law, also in the case of divorcing entrepreneurs.