Is Goodwill a Marital Asset that can be Distributed in a Divorce?
A common question that arises when determining the value of a business in a divorce case is the value of the goodwill associated with the business and whether it is something that can be distributed. The Supreme Court of Pennsylvania originally addressed this issue in the case of Solomon v. Solomon, 531 Pa. 113 (1992). In the Solomon case, the Court had to determine whether any goodwill existed in a veterinary practice where the doctor was a sole practitioner and dealt exclusively with breeding horses.
The Court in Solomon held that the type of goodwill must be determined before a decision can be made as to whether it is a marital asset that can be distributed. Until this case the Court had never dealt with the value of goodwill that was not set out in a partnership agreement. The Solomon Court, for the first time, explained the difference between personal goodwill and goodwill in general. The Court determined that personal goodwill is not distributable as a marital asset.
The Solomon Court explained that goodwill is the value of a business based on its reputation in the community. The idea being that a good reputation in the community will make customers want to continue to use the business and return to the business. The Court explained that if that reputation is tied to an individual then that goodwill would go with the person if they left the business and is therefore not divisible as marital property. In the Solomon case the Court did not actually define this as personal goodwill but simply stated that the business had no good will to divide.
In the Pennsylvania Court decisions that followed Solomon, the Courts further defined goodwill and its application to divorce and equitable distribution. The definition of personal goodwill has been expanded by the Courts of Pennsylvania to include professional goodwill. This is exemplified by a doctor, dentist or lawyer whose clients would follow that person if they went to a new practice. Professional good will is inextricably tied to the person’s ability to generate future income. See Smith v. Smith, 904 A.2d 15 (2006). This kind of goodwill cannot be transferred or sold because it attaches strictly to the person. It is, therefore, not distributable in a divorce case and should not be included in the value of a business.
The Courts have also further defined the goodwill that goes with a particular business based upon that business’ reputation which is called enterprise goodwill. This type of goodwill can be exemplified by a franchise restaurant such as Subway. The reputation of Subway is based on the product and most people that go there do not know or care who owns the franchise. This is a type of goodwill that can be expressed as the “going-concern value” which means a business that can continue to operate at the same level despite a change in ownership. Enterprise goodwill can be transferred and, therefore, should be included in the value of a business for distribution in a divorce. See Gaydos v. Gaydos, 693 A.2d 1368 (1997).
Of course, when valuing a business there may be elements of both personal goodwill and enterprise goodwill. A thriving dental practice for example may have a value in enterprise goodwill because of the benefit of taking over a business that is already set up and functioning while the value of the dentist’s relationships with his patients would not be transferable.
The valuation of a business can be a complicated matter and it is important to have an attorney who can work with an experienced certified business valuator in order to determine the types of and value of goodwill present in a business.
For more information on this topic or any other topic related to issues of divorce, custody, support or family law in general, please contact Kris Smull at email@example.com or call (800) 615-0115.