If either party in a pending divorce owns a business, it can certainly complicate the process. In many cases, the business may be a professional practice, like that of a lawyer’s, doctor’s, therapist’s, etc. In a number of other states, community property laws apply, but in South Carolina, marital assets are divided equitably.
In simple terms, a business is worth its combined value of assets and goodwill. When determining a business valuation, the court also factors in the fair market value of the business which is based on factors like:
- Net business value
- Fair market value of associated business stock
- Potential value or investment value
Goodwill Value – Moore vs. Moore
The goodwill value is the value associated with the business name, its location, established customer base, and anything else that would get someone to purchase the business for a dollar amount that exceeds the actual assets of the business.
In 2015, the South Carolina Supreme Court rendered an opinion in Moore vs. Moore, 414 S.C. 490, 779 S.E.2d 533, that helped distinguish enterprise goodwill from personal goodwill for the purpose of equitable distribution during a divorce. This particular case involved a wife’s lighting business that was in dispute as to its valuation. The court found that both enterprise and personal goodwill value can exist within a business.
- Enterprise Goodwill: This is goodwill that exists independently of your personal efforts, and outlasts your personal involvement within the business. It’s based on the intangible assets that make the business valuable, like the relationships with suppliers, employees, customers, etc. If you separate the existing owners from the business, enterprise goodwill will transfer to the new owner and live on with the new business owners. Because of this, enterprise goodwill has a determinable value.
- Personal Goodwill: This type of goodwill is associated with the owners and individuals. It is more closely associated with the earning capacity that comes from the personal reputation and skills of those most closely associated with the business. It’s implied that if the owners were not present, customers would seek an alternative business that is of the same type. If the goodwill is determined to fall under the personal goodwill side, any value is simply related to future earning capacity, which is not included in the valuation of a business for divorce purposes.
Why is Goodwill Value Important in Business Valuation?
Moore vs. Moore established that in South Carolina, enterprise goodwill is completely quantifiable, and therefore it is subject to equitable division during a divorce. The court even included some indicators that can help determine whether it’s more likely to be personal versus enterprise.
Personal goodwill indicators are:
- Typically a small business
- Owner is the only employee
- No real capital investment
- Service oriented where owner is an integral part of service
Enterprise goodwill indicators are:
- There are large capital investments
- Larger-scale business
- Sales or business is not reliant on services from the owner
- Income results from sales contracts and a team of sales people who solicit business
- Formalized supplier contracts and business systems
- There is more than one owner, especially ones who aren’t employees
Contacting a Family Law Attorney
If you’re preparing for a pending divorce and trying to value marital and non-marital assets, you need a qualified Greenville family law attorney to help you reach the correct business value that the courts will approve. Contact the team at Elliott Frazier Law Firm to schedule an initial consultation.