There is a lot involved in a divorce, especially if one of the spouses owns a business. A valuation of the business will have to take place when dividing the marital property community. The question arises whether there is goodwill that can be valued in monetary terms. Should a division of goodwill take place in a sole proprietorship?
The Court of Appeal of The Hague dealt with a case in which, within the framework of the distribution, it was questioned whether the wife had to pay an amount of goodwill to the husband. The wife was an entrepreneur and operated a one-man business. The court made a clear distinction between personal goodwill and business goodwill.
Earlier, in May 2002, the Supreme Court had already made a distinction between embodied or business goodwill and disembodied or personal goodwill. The Supreme Court ruled that embodied/business goodwill does fall within the community of property provided that the business goodwill can be valued independently as well as being transferable.
Business goodwill is directly related to a certain object, such as the location of a business or a brand name. In contrast, unincorporated/personal goodwill cannot be realised as an independent value. Personal goodwill relates to the personal capacity of the entrepreneur, such as for example professional knowledge. This goodwill is linked to the entrepreneur and is not transferable to third parties and is lost upon the entrepreneur's retirement or death.
In the opinion of the court, in this case there was no question of business goodwill as the profitability of the business was entirely dependent on the capabilities of the woman. There was personal goodwill, which did not fall within the community and therefore did not have to be divided.
The court of appeal considered as follows:
"For the answer to the question whether (the value of) goodwill of the company of one of the spouses should be included in the division of the matrimonial community of property, it is decisive whether that goodwill can be realised as an independent value. This is not the case if there is unincorporated (also: personal) goodwill.
When determining the personal goodwill, the personal capacity of the entrepreneur is central. These personal capacities are attached to the person concerned. If the entrepreneur, based on his or her personal capacities, is able to realise an excess profit within the framework of the exploitation of the company, then the economic value of this excess profit is linked to him or her. If the total profit from the enterprise is attributable to the personal capabilities of the entrepreneur, there can be no question of transferable excess profit in rem.
In the present case there is a company operated by the woman in the form of a sole proprietorship. The Court of Appeal considers a company to be an organisational link, aimed at sustainable participation in economic transactions. The woman is the entrepreneur and the pivot of the company. Her personal efforts and capacities are decisive for the results of the enterprise. In view of its size, the company is so limited that the organic link is formed exclusively by the woman and her personal capacities.
In the opinion of the Court, in the present case the operating result cannot be the basis for the calculation of the value of goodwill. The profit that is realised by the woman with the exploitation of the company, is exclusively attributable to her in person and, in the opinion of the Court, is connected to her. There could be a question of goodwill if the organic relationship of the enterprise has such a size that the enterprise is able to realise surplus profit even without the presence of the entrepreneur, in this case the woman. The Court of Appeal considers surplus profit to be profit that exceeds the usual profit of a similar company.
In this kind of proceedings, the question is therefore often whether the results of the enterprise depend on the capacities of the entrepreneur/spouse concerned or not. The smaller the enterprise, the more difficult it will be to separate the enterprise profit from the personal capacities of the entrepreneur. If there is personal goodwill, this generally does not have to be divided.
Do you have any questions about how your company should be divided or settled in your divorce, or do you need advice on divorce proceedings? Then please contact us without obligation. We will be happy to assist you.