Marital Property: How Goodwill Affects the Value of Your Business

The stress and contention involved in a Florida divorce often increase when your marital property includes a closely-held business. The way the courts view property can affect the valuation and may considerably influence your settlement.

According to Ellrich, Neal, Smith & Stohlman, P.A., many Florida appraisers use an asset value method when valuing a business for divorce purposes.

Asset-based valuation methods

All of the asset-based methods consider tangible assets, such as furniture and equipment. However, they are also flexible enough to take intangible assets, such as technology, into consideration.

An asset accumulation valuation identifies the assets and liabilities of your business, similar to a balance sheet, and assigns them value. It also encompasses internally generated intangible assets, such as patents, trademarks, and trade secrets. The value of the company is the difference between the assets and liabilities.

A modified version of the asset valuation method is the excess earnings approach. It takes the entity’s tangible assets and liabilities into consideration and integrates the income approach. This method uses formulas and historical information to help predict profits and cash flow, which affects the company’s value. The formulas encompass the rate of risk or return and future benefits. An excess earnings valuation also allows for the determination of your business’s goodwill.

Business and personal goodwill

The term “goodwill” describes an entity’s intangible value and goes beyond identifiable assets. Business goodwill includes long-term contracts, an established workforce, and a recognizable brand. Personal goodwill relates to the reputation and skills of an individual owner. Although the business goodwill transfers if you sell the company, personal goodwill does not.

The court views business goodwill as a marital asset and subject to equitable distribution. However, personal goodwill gets left out of the valuation. As a result, the valuation may not be as high as you anticipate. Understanding what the courts consider marital property is essential for negotiating an appropriate settlement.