Recent Georgia Case Reinforces that Enterprise Goodwill of a Professional Business Is Marital Property

April 20, 2011

When a couple decides that it is time to end their marriage they face many challenges, not the least of which is dividing the marital property. While there are exceptions, marital property is generally defined as property that is acquired after the date of marriage and before a spouse files for divorce. This can include a house, vehicles, bank accounts, debts, retirement funds and business interest.

The division of marital property at times can be fairly straight forward and at other times very complex -- dividing a closely-held or family business is one of the most complex divisions to be made. The complexity in dividing a business comes in the valuation of the business, as there are many factors to be considered and several ways that a valuation can be made.

In the recent case of Miller v. Miller, the Georgia Supreme Court recognized that there was more than one possible method for valuing a professional business -- including the business's goodwill -- when dividing the business interest between divorcing spouses. Further, the court noted that a court is free to accept either party's valuation of the business or calculate its own valuation of the business.

Goodwill

One of the key factors in the Miller case was how to value the goodwill of a professional business.

The court acknowledged that goodwill, while difficult to calculate, is considered to be one of the most valuable components of a business. Goodwill is generally considered to be a professional business' reputation, clientele and other intangible assets, including the location of the business.

Goodwill is really made up of two components -- enterprise goodwill and individual goodwill:
- Enterprise goodwill is a value that attaches to the business itself and is transferred with the business when it is bought or sold
- Individual goodwill is a value that attaches to an individual owner of a business which can neither be bought or sold, as it is synonymous with an individual's reputation

Holding that enterprise goodwill, which attaches to the business, is considered marital property, the court found it divisible during divorce. However, since individual goodwill attaches to the individual, the court found that it is not marital property and not divisible during divorce.

The court ultimately accepted the wife's valuation of the professional business, which recognized the two types of goodwill and accounted for both in the valuation of the professional business. The husband's approach to valuing the business neglected to recognize that enterprise goodwill was marital property, essentially considering all of the business' goodwill as individual goodwill.

The division of marital assets can be extremely complex at times, especially when a professional business is involved, and may require the assistance of an expert accountant. Seek guidance from an experienced family law attorney when you face a complex or high-asset divorce.

Article provided by Edwards & Associates
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