Stephanos v. Stephanos - Personal vs. Enterprise Goodwill in Divorce
The treatment of business goodwill in divorce cases varies from state to state. Courts in more than half of the states make an important distinction between personal and enterprise goodwill. Here’s some insight from a recent Florida circuit court decision on this issue.
Florida Applies Majority Rule
Goodwill is an intangible asset that results from a business’s name, reputation, customer loyalty, location, products, and similar factors. Like many other states, Florida law treats enterprise goodwill as a marital asset subject to division. But it specifically excludes personal goodwill from the marital estate when alimony is awarded based on a spouse’s earnings from the business.
Enterprise (or business) goodwill is associated with the business as a standalone entity. It may be attributed to the business’s location, brands, and employees. Personal (or professional) goodwill is associated with a specific owner’s or employee’s reputation, skills, experience, and education.
Husband had Limited Role
In Stephanos v. Stephanos, the husband was sole owner of a hormone replacement therapy clinic. The Florida Circuit Court for the Fifteenth Judicial Circuit ruled that the wife had met her burden of proving that the clinic’s goodwill was a marital asset.
The wife had hired a business valuation expert who used the residual method to estimate the value of goodwill. He determined that the company’s fair market value was $5.3 million. Next, he allocated $3.1 million to the company’s net assets. The remaining $2.2 million (the residual) was attributed to goodwill. The wife presented ample evidence to demonstrate that all the goodwill value was enterprise goodwill and, therefore, subject to equitable distribution.
She also offered substantial evidence that her husband’s role was so limited that he contributed nothing to the business. Among other things, the husband had a previous felony conviction in connection with illegal steroid sales. In addition, several employees testified that he had little or no involvement with managing the company or dealing with customers or business affiliates.
Absent any credible evidence that the husband played a key role in the business, the court found that all the goodwill was enterprise goodwill. The court also rejected the husband’s argument that the goodwill was personal to him because a buyer of the company would demand that he sign a noncompete agreement.
Consult a Valuation Expert
Stephanos is an unusual case. It’s rare that a service business owned by one individual would have no personal goodwill, but it sometimes happens. Distinguishing between enterprise and personal goodwill is a challenge, so it’s important to involve a business valuation expert.