Valuing a Business Entity: The Role of “Personal Goodwill”
Determining the value of a business for purposes of equitable distribution is a complex and complicated process. In many cases, a court may order that a forensic accountant be appointed to assess the value of the business that is subject to equitable distribution. The concept of “goodwill” is one of the elements that can be considered when defining the value of a business.
“Goodwill is essentially the positive reputation that a particular business enjoys.” Gaydos v. Gaydos, 693 A.2d 1368, 1372 (Pa. Super. 1997). The Pennsylvania Superior Court has defined goodwill as “the favor which the management of a business has won from the public, and probability that old customers will continue their patronage.” Id.
There are various types of goodwill that courts consider when valuing a business for purposes of equitable distribution. Personal goodwill is “intrinsically tied to the attributes and/or skills of certain individuals [and] is not subject to equitable distribution because the value thereof does not survive the disassociation of those individuals from the business.” Id. A sole proprietorship whereby Enterprise goodwill is subject to equitable distribution and is “wholly attributable to the business itself.” Id. (internal citations omitted). Enterprise goodwill is the goodwill attributed to the business itself and is not dependant upon any single individual. It relies on the established relationships with customers and will outlast any person’s involvement in the business.
Defining the value of the enterprise and personal goodwill of your business can make a critical difference in equitable distribution process. For example, if the court finds that a portion of your business is personal goodwill, then that amount will not be included in the calculation of the martial estate. However, if the court finds that the business has enterprise goodwill, that amount will be subject to equitable distribution.
If you are a business owner going through a divorce, contact LaMonaca Law at (610) 892-3877 to schedule a consultation to further discuss the valuation of your business for the purposes of equitable distribution.