In the process of valuing a business, especially in divorce, the business owner often comments “but the business is not worth anything without me.” This could be true, however, in the context of a divorce, in equitable distribution states this statement is false for the following reasons.
First off, the business is valued on the premise of going concern. This is the assumption that the business is going to continue to operate into the near future and has no intention of liquidating or curtailing its business operations.
Secondly, there is the concept of value to the holder, especially for small businesses. Value to holder is the concept of the value of the business to the business owner (the holder). For example, if a sole proprietor earns $50,000 more than what he/she would be paid for a salary on the open market, that $50,000, using a multiple of five, would have approximately $250,000 in value to that sole proprietor. Even if there is no market for his/her business, it has value to him/her.
Both the previous situations enable the non-owner spouse to participate in an asset division of the privately held business.
There could be other factors involved.
Personal Goodwill vs. Practice/Enterprise Goodwill
In Massachusetts, Personal Goodwill is not a divisible asset in a divorce. It is important to distinguish between personal goodwill and practice or enterprise goodwill.
Personal goodwill is the value of the business that is attributable to the skills, reputation, relationships, and expertise of an individual, usually and owner, of the business. This portion of the value can not be transferred to another individual. The lack of transferability is the key concept. Business owners think that it is just because they have good relationships and expertise that they have personal goodwill. This is often not the case. A business valuation expert has good relationships and expertise but that does not mean other business valuation experts do not have the same skills and the relationships could be transitioned in an orderly way once they feel comfortable with the new expert.
A good example of personal goodwill is dental practice. Certain patients use the practice because of a particular dentist and would follow the dentist wherever he/she would go. Other patients go to the practice because it is convenient for them and is in a convenient location.
Practice/Enterprise Goodwill is the intangible portion of the value of a business. It is the total value less the value of the tangible assets (equipment, furniture, etc.). It is created through the business’s relationship with customers, location, brand recognition. This goodwill is tied to the business itself and not a particular individual.
There are many aspects of the division of assets that must be considered when a private business is involved. An experienced business valuation expert can not only navigate through these concepts but help explain them in a way to help the litigation process move forward.
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