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Florida Changes Rules for Equitable Distribution of Closely Held Business Interests in Divorces by Sandra Perez, CPA/ABV/CFF, CFE, and Dylan Stone, CPA, CVA

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Posted on November 26, 2024 by Sandi Perez

On July 1, 2024, the State of Florida added Fla. Sta. §61.075(6)(a)1.f, which specifies how trial courts value a marital interest in closely held businesses for the purposes of equitable distribution in divorce proceedings. Significantly, the new law, also referred to as House Bill 521 (HB521), addresses the valuation of marital interests in closely held businesses and the influence of goodwill and restrictive covenants, such as non-competes on those appraisals. The new law will have a significant impact on divorce proceedings in the state.

 Standard of Value: FMV

 Standard of value is a conceptual term used by business appraisers and valuation professionals. It serves as a critical assertion that defines the methods to be used in determining a business’s value. Fla. Stat. §61.075(6)(a)1.f. provides that the standard of value, for purposes of equitable distribution is fair market value (FMV), or:

“…the price at which property would change hands between a willing and able buyer and a willing and able seller, with neither party under compulsion to buy or sell, and when both parties have reasonable knowledge of the relevant facts.”

One of the primary inferences of using the FMV method is the presumption that the buyer and seller have no special motivations to conduct the transaction. Therefore, an appraiser conducting a valuation for the purposes of equitable distribution would be precluded from giving weight to potential synergies between the buyer and seller. This is significant because those synergies may be considered under alternative standards of value and subsequently increase the valuation of the business interest.

Influence of Goodwill on FMV

 “Goodwill”, in the valuation context, is the advantage or benefit a business has beyond the value of its property and capital.[1] It can be attributable to the company’s brand name, reputation, location and product offerings (enterprise goodwill) or the business owner’s skills, expertise and relationships (personal goodwill). In other words, enterprise goodwill exists despite the owner or operator of the business and is transferable to the buyer. By contrast, personal goodwill is held by the business owner and, therefore, cannot change hands or convey to a new owner upon a business sale. For example, a surgeon’s personal training, skill and reputation do not transfer to a new physician who purchases the practice.

Fla. Sta. §61.075(6)(a)1.f further confirms that enterprise goodwill, which remains with a company after the owner’s exit, is a marital asset that must be valued and distributed equitably in divorce. By contrast, personal goodwill is a non-marital asset and, therefore, not included in the marital estate subject to equitable distribution. There is often a material difference between the enterprise goodwill and the personal goodwill of a business interest.  When there is substantial personal goodwill, the value for divorce purposes may be much lower than the value garnered from a potential sale of the business to a third party.

Another valuation consideration promulgated by Florida’s new law is the existence of a non-compete agreement or other restrictive covenant required in a business sale. Previously, when a business sale required a non-compete or restrictive covenant, its value was generally treated as personal goodwill and, therefore, not part of the marital equitable distribution. Today, however, courts may consider a portion of the restrictive covenant as enterprise goodwill, thereby increasing the value of the marital estate. It is up to the courts to make that distinction and determine whether such instruments should be considered martial assets. After all, Fla. Stat. §61.075(1) states, “…in distributing the marital assets and liabilities between the parties, the court must begin with the premise that the distribution should be equal unless there is a justification for an unequal distribution based on all relevant factors…”

Methodologies for Allocating Goodwill

Florida statutes and case law do not provide guidance on which valuation method professionals must use for allocating goodwill between personal and enterprise categories. This can create a challenge when it comes to presenting and defending value calculations.

While there are various methodologies valuation professionals can use to assess and allocate personal goodwill from enterprise goodwill, they frequently rely on the Multi-Attribute Utility Model (MUM) and the With/Without (WWO) method. The decision of which one to use depends on the business’s unique facts and circumstances and an understanding of the benefits and limitations of both methodologies.

The MUM method is a calculated technique that identifies various attributes of goodwill and develops a system of weighing their existence and relative importance. While the MUM method requires a calculation to attribute and allocate between personal and enterprise goodwill, the attributes and weightings can be seen as subjective.

Alternatively, the WWO method values the personal goodwill of a business by comparing its cash flows with personal goodwill in a hypothetical situation where the company does not have the benefit of the owner’s personal goodwill. The “without” scenario assumes lower margins and the notion it will take the company time to replace the profits it loses; therefore, cash flows are adjusted downward to incorporate these factors. The application of this method can be considerably more complex than the MUM method and relies on a future expected cash flow. While the WWO method can be considered less subjective, the MUM method may serve as a reasonableness test of the WWO method.

The addition of §61.075(6)(a)1.f to the Florida statutes outlines principles that assign separate values for personal and enterprise goodwill, bringing more fairness to the process of equitable distribution. The use of valuation experts is critical to help the trial court in the appropriateness of valuation techniques used to allocate goodwill for equitable distribution purposes.

About the Authors: Sandra Perez, CPA/ABV/CFF, CFE, is director of Family Law Forensics practice with Berkowitz Pollack Brant, where she works with attorneys and high-net-worth individuals with complex assets in all areas of divorce proceedings.

Dylan Stone, CPA, CVA, is a senior manager with Berkowitz Pollack Brant’s Forensic and Advisory Services practice, where he provides family law forensic accounting, business valuation services, and forensic services on other litigation-related matters.

They can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or info@bpbcpa.com.

[1] See Swann v Mitchell, 435 So. 2d 797 (Fla. 1983).