When a couple decides to get a divorce, one of the most important decisions they will make is how to divide their assets. This decision can be especially difficult when it comes to businesses. Determining the value of a business can be tricky, and goodwill can add an extra layer of complexity. In this article, we will discuss goodwill and how it impacts the valuation of a business in Illinois divorce proceedings.
Understanding How Value Is Determined Is Key
If you are involved in a divorce in Illinois and you own part or all of a business, understanding how the value of a business is determined from an Illinois divorce law standpoint is important. The value of a business is not always as simple as looking at the business’s bank balance or profits. Goodwill can and will play a role in the valuation.
- What is “goodwill” in the context of a business?
- What types of goodwill are there?
- How are they treated by a divorce court in Illinois?
These are all important questions and having a solid understanding of this concept will help you gain a better understanding of how your business will be impacted by your divorce.
Under Illinois law, “goodwill” is defined as “the value of a business or practice that exceeds the combined value of the physical assets.” In re Marriage of Talty.
Most businesses sold on the open market sell for more than the combined value of their assets. This is because goodwill exists in the business.
First, “goodwill” is “the propensity of customers to return” to a business, as defined by Shannon Pratt in “The Lawyer’s Business Valuation Handbook.”
“Goodwill” is also defined by the American Society of Appraisers as: “That intangible asset that arises as a result of name, reputation, customer patronage, location, products, and similar factors that have not been separately identified and/or valued, but which generate economic benefits.”
What Is Personal Goodwill?
Two types of business goodwill exist personal and enterprise goodwill.
Personal goodwill is “the skill, the expertise, and the reputation of the professional” as defined by the court in Marriage of Zells.
An example of this is the goodwill built by a local accountant or dentist – the relationships built by the individuals keep customers returning to the business. If the owner left the business, the business would be worth zero (or no more than the value of the hard assets like furniture and the accounts receivable).
The concept that personal goodwill was non-marital property and not divisible as a marital asset was reinforced by the Illinois Supreme Court in In re Marriage of Schneider.
In that case, the court clarified that personal goodwill was the income-generating potential of the person, which was reflected in a maintenance (alimony) award.
The court ruled that personal goodwill could not be marital property because it is not realizable, and dividing personal goodwill would equate to double-dipping with alimony.
What Is Enterprise Goodwill?
Enterprise goodwill, on the other hand, is goodwill not due to any one individual but related to other factors, like brand, location, and the like.
An example of enterprise goodwill is that held by McDonald’s corporation. A McDonald’s customer does not care who manages or works at the individual McDonald’s store, they care that the store is a McDonald’s, as they have come to expect certain products and services there.
What Are The Differences Between Personal And Enterprise Goodwill?
The important distinction between the two types of goodwill from an Illinois divorce case perspective is that under Illinois law, personal goodwill is a non-marital asset and therefore not subject to division in divorce, while enterprise goodwill is a marital asset subject to division (assuming the business in question is a marital asset as well).
Note that some businesses may have components of personal and enterprise goodwill. In Illinois, courts have found both to exist in the same business, such as in a car dealership (In re Marriage of Talty).
Assets Or Income? Marital Property Or Not?
Understanding the nature of your business and the elements of personal and enterprise goodwill helps determine whether a business has any marital asset value subject to division, or whether the business really just represents a stream of income to the business owner subject to maintenance (alimony) payments to the non-owning spouse.
Take The Next Step
If you are going through a divorce in Illinois, or if you think your spouse may be considering divorce and you own a business, it is important to understand goodwill and how it may be valued in your divorce. Hiring the right divorce attorney who understands the law in Illinois and specializes in business valuations can ensure that your business is properly valued and that you receive a fair division of assets for your case.
If you are considering divorce and have questions about business goodwill or other asset division issues, contact an experienced Illinois divorce law attorney today.