Enterprise vs. Personal Goodwill: How they differ and affect divorce valuations

Estimating the value of intangible assets such as goodwill can be highly speculative. This is often a significant point of contention in scenarios involving two parties rallying for a business’s fair market value. We see it all the time in divorce proceedings.

The 101 on Goodwill & Divorce

Goodwill can be segmented into two categories: enterprise goodwill and personal goodwill. Enterprise goodwill attaches value to a company’s specific competitive advantages or differentiators, indicating that these factors contribute to the company’s earnings potential. Personal goodwill ties value to an individual’s contribution to a company’s operations, such as relationships that are not deemed transferrable upon the absence of said individual. Ultimately, personal goodwill states that an element (aka a revenue/earnings stream) would disappear with the loss of a particular individual.

Jurisdiction Matters

Each state treats the inclusion or exclusion of personal goodwill as a marital asset differently. Below is a breakdown of how the country fairs:

• 19 states include personal goodwill as a marital asset
• 24 states plus DC exclude it
• 8 states have no formal precedent

Goodwill’s Impact on Value

The inclusion or exclusion of goodwill can have material impact on the overall value of a business – which is more than likely a small business owner’s largest asset. However, overstating the valuation with goodwill may base divorce proceedings on a company value that may or may not be realized.

Summed Up:

Suppose you need to know the actual value of something, such as for a sale, buy-sell agreement, acquisition, or divorce. In that case, it is recommended that you have an actual valuation conducted by a qualified professional. While estimates can be helpful in informal scenarios, a certified valuation is necessary for legal and formal purposes.

Since 2003, Quantive has performed over 3,000 business valuations. Contact our valuation specialists for a no-cost consultation today.