When married partners are contemplating divorce, there are many complex issues that must be handled during the divorce process. These can include child support, child custody, and distribution of marital assets to name a few.
In cases where the divorcing couple owns a business, either jointly or individually, the divorce process becomes even more complex. This is because properly dividing a business involves more than just family law. Oftentimes, a business owned by one or both spouses is the most valuable asset involved in property division during a divorce case, along with retirement benefits and pension plans.
“Double-Dipping,” sometimes referred to as “double counting,” is a term that refers to the legal situation in which one spouse gets paid twice for a single asset. Typically, courts do not allow one spouse to receive double payment for a single asset in the divorce process, as courts favor an equal distribution of marital property and assets.
For example, if a marital asset is counted twice, first during the division of property, and then again when calculating the amount of spousal maintenance (“alimony”), this will likely be considered double-dipping. As mentioned above, double-dipping in divorce cases commonly occurs when dividing non-tangible assets. These assets may include retirement benefits and pension funds, but also includes business interests such as business goodwill.
How is “Goodwill” Managed in Divorce?
“Goodwill” is a term used to describe the primary intangible asset of a business, which generally includes illiquid assets that have value, but are hard to calculate and physically inspect. Goodwill assets may include, but are not limited to a business’ intellectual property, reputation, or brand identification.
However, goodwill can also be attributed to an individual, which is generally referred to as personal goodwill. For example, if one of the spouses in a divorce is a celebrity, their future earning potential associated with their name, brand, skills, or reputation, will be classified by courts as personal goodwill.
How is Goodwill Calculated in Divorce?
It is important to know the differences between personal goodwill and business/enterprise goodwill. In most states, goodwill attributable to the individual is not part of the marital estate, and is therefore not subject to division. On the other hand, goodwill attributable to the business entity, is commonly treated as part of the marital estate, and, thus, subject to division in divorce.
In a business setting, goodwill is typically calculated as the difference between the purchase price of a company and the fair market value of the company’s identifiable assets and liabilities.
For example, if a company has a fair market value of $10 million, but is valued by prospective purchasers at $15 million, then a $5 million goodwill exists. However, the calculation of business goodwill will depend on your local jurisdiction. Expert witnesses are often hired and utilized by both parties to submit their calculation of the business goodwill.
Some of the factors that a state may consider when calculating goodwill and distributing it to the marital estate include:
- The length of the marriage;
- Whether the business was created or acquired before or during the marriage;
- How involved each spouse was in managing and operating the business during the marriage;
- Whether spousal support will be ordered; and
- The amount of personal goodwill involved in the business’ valuation versus goodwill solely attributable to the business. For example, if a company is valued at $10 million, but $2 million of that is attributable solely to one of the spouse’s personal goodwill (such as their unique business skills or business relationships), then only $8 million will be included in the marital estate.
Generally, courts prefer to approach the calculation of business goodwill during divorce hearings on a case-by-case basis. This means that even in the same jurisdiction, calculations of business goodwill can drastically vary with each case.
How do Courts Avoid Double-Dipping?
There are several ways in which a court may avoid double-dipping for goodwill during the pendency of a divorce proceeding. For instance, a court may just exclude business goodwill altogether when determining the share marital estate. This is especially true in cases in which spousal support is ordered, as courts will use business goodwill as a factor when determining alimony.
Further, a court may treat the business as if it were dissolved at the time of the divorce filing, and divide the business equally between the two spouses in accordance with the community property laws of the state. Additionally, some courts may even treat the business goodwill and future income as spousal support. However, the aforementioned solutions to double-dipping also have drawbacks.
For example, if business goodwill is simply treated as spousal support, then both parties will have to agree on that arrangement. Thus, many courts are reluctant to issue a spousal support order, that is based solely on a business’ goodwill, especially given the fact that businesses may come to an end.
Should I Hire an Attorney for Help with Divorce Matters?
As can be seen, double-dipping and goodwill in divorce proceedings can be extremely complex. Oftentimes, an expert witness will have to be hired in order to help calculate the amount of business goodwill and other parts of a business valuation. Thus, it is in your best interests to consult with a knowledgeable and well qualified divorce attorney.
An experienced divorce attorney will be able to advise you on how your state laws affect the distribution of your property and assets. They can also advise you on how you may avoid the issue of double-dipping. Additionally, they will be able to hire expert witnesses, and represent you in any court hearings or in any alternative dispute resolution procedures.