Is My Business in Jeopardy if I get a Divorce?
If you own a business and are thinking about going through a divorce, you might be asking yourself, is your business considered an asset that can be divided by the court? In short, the simple answer is that it depends. In determining whether your business is an asset, or to the extent which it’s considered an asset, the court will look at the business’s “goodwill.” A widely accepted definition of goodwill is the value of a business beyond the combined value of its net assets. Goodwill is then divided into 2 different categories: “enterprise goodwill,” and “personal goodwill.”
Enterprise goodwill is the portion of the goodwill that results from the business having established relationships with customers, employees, and suppliers. On the other hand, personal goodwill is goodwill that is derived from the continued existence of a particular person or persons associated with the business.
Let’s take a well-known fast food restaurant as an example. Say a group of people decide to eat at a particular fast food restaurant. They have eaten at that restaurant before and go back in the future, presumably in part because they like and prefer that food. These people then recognize the brand of that restaurant and may visit the restaurant in the future after simply seeing the sign to the restaurant. These customers do not choose to eat at that restaurant because of the presence of any particular employee that works for the company and so they are likely to continue eating there regardless of who the employees are. In this example, the fast food restaurant would have substantial enterprise goodwill and very little to no personal goodwill.
On the opposite end of the spectrum would be businesses like professional practices that are heavily reliant upon the person or persons providing the services. For example, say there is a physician who is a solo practitioner and highly-regarded in his community. Because of his reputation, he attracts more new patients than he is able to accept. If he were to try to sell his practice to another physician who just moved into that community, it would be unlikely that the new physician would continue to receive as many new patients as did the selling physician. Prospective patients may instead seek out the selling physician at his new location because of his reputation instead of going with the newer, unknown physician. This would be an example of a business that has substantial personal goodwill and very little to no enterprise goodwill.
A significant case on this topic is Yoon v. Yoon. Prior to this case, Indiana did not recognize a distinction between enterprise and personal goodwill. Typically, an expert would just have been called and would assign a value based upon the total goodwill. In such a situation, different experts in business valuation could have vast differences in their opinions of a business’s value. The significance of Yoon is that it drew the distinction between enterprise and personal goodwill, finding that enterprise goodwill could be properly included as an asset of the marriage while personal goodwill could not. The Indiana Supreme Court’s reasoning was that personal goodwill is basically a measure of a person’s ability to generate future income in the business. Since, under Indiana law, a person’s future income is expressly not a marital asset subject to division in a divorce, then neither should personal goodwill. It should be noted that personal goodwill is not necessarily irrelevant in a divorce. Personal goodwill can be used to evaluate the future earning capacity of a spouse and, as such, it can be used by the court as a basis to deviate from the presumed equal division of the marital estate.
The distinction between enterprise and personal goodwill is not always cut and dry, for example, companies can be compromised of a range of both personal and enterprise goodwill, and so you should consult with a local attorney to determine whether your business may be considered a marital asset, or to what extent your business may be considered an asset. If you are thinking about a divorce, child custody, or support case, the attorneys at Banks & Brower, LLC can help you. Give us a call at (317) 870-0019, or email us at info@banksbrower.com. We are available to take your call 24/7/365.