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Will Florida Family Courts Begin Valuating Personal Goodwill when Dividing Marital Assets? by Sandra Perez, CPA/ABV/CFF, CFE

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Posted on June 13, 2019 by Sandi Perez

A recent circuit court decision in Palm Beach County, Fla., has the potential to change three decades of case law concerning the valuation of business goodwill and equitable distribution of business assets during divorce proceedings.

The trial court in the matter of Stephanos v Stephanos accepted the wife’s expert opinion that none of the business’s residual value, or goodwill, was dependent of the husband’s personal skills or participation in the company. Rather, the court found that all of the business’s goodwill value was attributable to the enterprise, which is considered a marital asset subject to equitable distribution in divorce.

Business Goodwill in Florida Divorces

Enterprise goodwill refers to the intangible but quantifiable attributes of a specific business that contributes to its profits and are transferable to a new owner upon a business sale, including its name, brand reputation, products, patents, customer base, employees and location. Under Florida law, enterprise goodwill, also referred to as corporate goodwill, is a martial asset subject to equitable division between divorcing spouses.

Conversely, personal goodwill, also known as professional or individual goodwill, is defined as the intangible value of a business that is related to and dependent upon the company owner’s professional reputation, knowledge and skill; it is not considered marital property subject to division because it is personal to the owner. In other words, if an entrepreneur sells his or her company, the goodwill attributable to his or her unique talents, knowledge, characteristics and personal relationships remain with him or her. They are not transferable to a new owner nor is the value of that goodwill.

How courts treat goodwill varies from state to state, with Florida law aligning with the majority of jurisdictions and excluding personal goodwill from the valuation of private businesses for purposes of dividing marital assets. Existing Florida law has relied on the state Supreme Court’s decision in Thompson v. Thompson, which held that “if a party can produce evidence demonstrating goodwill as an asset separate and distinct from the other party’s reputation, it should be considered in distributing marital property.” Yet, for Florida divorces, there has not been much case law on the methodology for carving out personal goodwill.

In the Stephanos matter, the wife was able to demonstrate that despite the husband’s sole ownership in a privately held family business, there was enough credible evidence to allocate all of the goodwill to the enterprise. Wife’s expert pointed to the husband’s felony conviction and a general consensus among employees that the husband had a limited role, if any, in managing the company and maintaining relationships with its customers and affiliates. In the end, the court awarded ownership of the business to the husband while also agreeing with the wife’s expert testimony that of the business’s $5.3 million valuation, all $2.2 million of its goodwill was enterprise goodwill subject to equitable distribution in divorce.

Valuing Florida Business Assets under the Stephanos Decision

Goodwill is generally defined as the portion of the value of a company that exceeds the value of its tangible assets. However, goodwill is not a business’s only intangible asset. Financial consideration may also be given to a company’s trademark, domain names, intellectual property and contracts, all of which are separable from the business entity. For valuating these intangible assets, financial reporting and IRS rules require the use of the purchase price allocation (PPA) method.

In Stephanos, the wife’s expert used the PPA method to value certain intangible assets of the company, thereby limiting the remaining amount that would be attributed to goodwill and subject to debate over its qualification as personal or enterprise goodwill. Ultimately, the court agreed with the application of the purchase price allocation method to value and carve out the business’s other intangible assets from what could have been a larger amount of goodwill subject to the debate in the personal / enterprise distribution question. According to the court, the remaining goodwill was not personal, and therefore, the entire value of the business was subject to equitable distribution between both parties.

Separately identifying and valuating personal goodwill from enterprise goodwill is a challenge, especially within the context of family law. The lines between the two are often blurred, making it easier for one or both parties to distort the truth and overstate goodwill value. Under these circumstances, legal counsel can benefit from certified valuation professionals who can create a trail of facts to distinguish between professional and institutional goodwill and provide expert testimony to support their findings. Valuation analysts are adept at conducting interviews and collecting evidence to accurately estimate the degree to which enterprise and/or personal goodwill exists and what a hypothetical willing buyer would pay for the owner’s interest in the business.

About the Author: Sandra Perez, CPA/ABV/CFF, CFE, is director of the Family Law Forensics practice with Berkowitz Pollack Brant, where she works with attorneys and high-net-worth individuals with complex assets to prepare financial affidavits, value business interests, analyze income and net-worth analysis and calculate alimony and child support obligations in all areas of divorce proceedings. She can be reached in the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000 or via email info@bpbcpa.com.

 Information contained in this article is subject to change based on further interpretation of the law and subsequent guidance issued by the Internal Revenue Service.