One of the trickiest and complicated issues during a divorce is valuating a business. One part of valuation is a concept called goodwill. Goodwill represents the continuing value of a business venture. Inherent in its value are factors such as the name of the business, location, reputation and the ability of the members of the business. In other words, goodwill is the intangible part of the business as opposed to the brick and mortar value of the business. Depending on the business, goodwill can be the most important value of the company. Also, a business need not be salable to have goodwill or does it need to have physical assets.
Washington law makes clear that division of community property must include goodwill. Determining valuation of goodwill can be a murky venture. There are five recognized formulas for valuing goodwill: straight capitalization accounting method, capitalization of excess earnings method, IRS variation of the capitalization of excess earnings method, the market value approach, and the buy/sell agreement method. The help of professionals such as accountants and appraisers will help with this. The business owner’s age, health, past earning power, reputation the in the community for judgment, skill, knowledge and comparative professional success are all consider in determining goodwill value.
However, in valuing professional goodwill, the earning capacity of the professional is largely an individual attribute. The earning capacity is community property during the marriage. But it becomes separate property after divorce. Courts will be make a distinction between professional goodwill at time of marriage and what is earning capacity which is separate property.
As you can see valuation of goodwill is complicated. There are many factors that determine the value and every case is different. If you have any questions about business valuation or goodwill, please contact Jeff Burleson for a consultation.