small restaurant

Business Division: Goodwill and Double-Dipping

An article published by Arkansas Money and Politics in November 2018, reported that there are 244,977 small businesses in Arkansas making up approximately 99.3 percent of the total businesses. Watching a business grow from an idea to a viable income stream is exciting; however, when nearly a quarter of all marriages in Arkansas end in divorce those businesses that were developed and groomed during marriage become a topic of discussion during divorce proceedings. In order to maintain the income level, selling or liquidating the business and dividing the proceeds is not typically the best way to divide the business asset. There are many things the courts look at when determining the fair market value of a business. Tangible assets such as real property (buildings and real estate), inventory and equipment are easily identifiable and fairly easy to assign a value to, but intangible assets such as goodwill are often much harder to give an exact dollar value.

What is goodwill? The law breaks goodwill down into two categories: personal and enterprise.  Personal goodwill is associated with the personality and individual excess value brought to the business by the individual owner and is not divisible. A good example of this is a celebrity. The celebrity’s future earning potential is associated with his or her name, brand, skills or reputation and will be classified as personal goodwill. Enterprise or business goodwill is the intangible value associated with the business as a unit itself and is considered to be a part of the existence of the particular business as a going concern. The going concern aspect of enterprise goodwill is the value that assumes the company will remain in business indefinitely and continue to be profitable. The going concern portion of this is important because an ongoing operation has the ability to continue to earn a profit further contributing to its value and will bring a higher value than simply liquidating the tangible assets in a business. For example, suppose a company’s liquidated value is $1,000,000 representing the current value of inventory, buildings and all other tangible assets that can be sold. Now, let’s consider the same company’s going concern value. That value was determined to be $10,000,000 when taking all factors into account. These factors can be the fact that the company has an outstanding reputation at being the best in the business, its patents, customer base, and many other intangible assets contributing to the value that cannot be sold off. An easy way to determine goodwill is to calculate the difference between the purchase price of a company and the fair market value of the company’s identifiable assets and liabilities. So, if the company above was purchased for $1,000,000, but has a fair market value of $10,000,000 then the courts would consider that a $9,000,000 goodwill exists. Unfortunately, divorce cases are usually not that cut and dry. Most of the time expert witnesses are hired by each party to determine their calculation of the business goodwill.

A few factors affecting the calculation of the value of the goodwill are:

  • The length of the marriage;
  • When was the business created or acquired – before or during the marriage;
  • How involved was each spouse in the operation of the business;
  • The amount of personal goodwill involved in the business’ valuation versus goodwill solely attributable to the business.

Another area of concern when dividing a business is “double-dipping” or sometimes referred to as “double-counting.” This is when a spouse gets paid twice for a single asset. The courts do not normally allow one spouse to receive double payment for a single asset as they favor equal distribution of marital property and assets. Double-dipping most often occurs when dividing intangible assets such as goodwill and business interests. This happens when the marital asset, the business, is counted twice. First during the division of property and then again when calculating the amount of spousal maintenance/alimony. In order to avoid double-dipping, a court may exclude the business goodwill altogether when determining the share of the marital estate. Sometimes the court may consider the future income as spousal support.

Divorces are difficult and when one considers all the caveats to dividing a business, it is imperative to see an experienced attorney that can help you navigate through the process. Kevin Hickey Law Partners not only has extensive family law experience, we also have extensive experience helping clients divide businesses. When you are faced with a divorce and the division of your business, call one of our experienced attorneys today.