One of the areas that results in extensive litigation in a dissolution of marriage proceeding is the valuation of a spouse’s interest in a sole proprietorship, partnership, or closely-held business. The value of a business consists of tangible assets, such as equipment, material, etc., and intangible assets. Intangible assets are divided into three categories: personal goodwill, enterprise goodwill, and separately identifiable intangible assets, such as patents, trade names, customer lists, etc.
Goodwill is defined as a collection of intangible assets that generates earning power superior to that which would be generated by a business’s tangible and separately identified and quantified intangible assets. Intangible assets contribute to, and are thus attributed to, goodwill if they cannot, or cannot easily, be separately identified for purposes of quantification.
Personal goodwill is defined as “goodwill that attaches to the persona and personal efforts of an individual” and ends when the individual terminates his involvement with the company. The Illinois Supreme Court has held that personal goodwill is not a divisible marital asset because it represents the ability to acquire future income. Thus, value attributable to personal goodwill is reflected in the maintenance and support awards paid to a spouse, and excluded when determining the value of a business for the purpose of dividing marital property. The Supreme Court stated: “To figure goodwill as a divisible marital asset and a factor in examining the husband’s income potential [for a determination of maintenance and support] would be duplicative and improper.”
To calculate the value of personal goodwill so that it may be excluded from the business valuation, a party must first have a valuation expert determine the value of the total goodwill of the business. Typically, the value of total goodwill is determined by calculating the value of the company as a whole and subtracting the value of tangible and identifiable intangible assets.
Once the value of total goodwill is established, the value of personal goodwill can be determined. The valuation expert will use various methods, such as customer and industry surveys and employee interviews, to decide what portion of total goodwill can be attributed to a particular person’s efforts, reputation, relationships, skill and knowledge.
After the valuation expert has established the value of personal goodwill, the value of the business subject to division by the parties – total value less personal goodwill – will be evident. The parties can then negotiate the division of the marital estate or, if no settlement can be reached, the court can rule on the division of the marital estate after trial.
If you would like more information regarding the valuation of business interests in marriage dissolution proceedings, please telephone a member of the firm.