What is goodwill in a business?
Black’s Law Dictionary, goodwill is a business’s primary intangible asset. It is comprised of such things as reputation, contact networks, branding, and intellectual property.
This is in contrast to tangible assets, such as equipment, inventory of goods, right to lease a property, etc.
When a business is sold, a certain amount of the sales price can be allocated to goodwill. Goodwill is always a subjective estimate. It may be a factor such as the right to do business in a certain geographical area for a certain period of time without competition from the seller.
A seller may often want a high value placed on a business’s goodwill, since goodwill is not subject to capital gains tax. Conversely, a buyer may want goodwill to be a relatively small number, because it cannot be depreciated for tax purposes like tangible assets.
In the context of a divorce, goodwill comes into play when a court decides how to equitably divide marital assets.
So how does the court equitably decide a business that was acquired or started during a marriage? One can envision a number of methods to do this. Perhaps the business could be sold or liquidated and the net proceeds divided evenly.
But this is not always satisfactory since the business may be a viable ongoing concern that would be economically wasteful to sell immediately. Or one party or the other may rely upon the business as their primary source of income.
The parties could continue to work at the business together and divide the net profits equally. But presumably this will not work because, after all, the parties are getting divorced because they cannot get along with each other.
So sometimes a court may order the party who primarily works in the business to pay the other party an equitable share of the business in the form of a secured payment over a period of time. This is what happened in the case of Lunt v. Lunt, 2024 UT App 148.
But how is the goodwill of a business divided? It depends on the nature of the goodwill. Any portion of the goodwill of a business that is considered personal will not be divided. But any portion of goodwill that is considered “enterprise” goodwill is subject to division.
In order to understand the difference, suppose a plumber is self-employed in his own business. Suppose further that he only has one employee, say a secretary or a part-time bookkeeper. He has generated a large customer base through word of mouth and reputation. These customers use his services because they have come to trust him on a personal level.
On the other hand, suppose that a plumber starts a plumbing business and expands it, hiring many other plumbers. The owner begins to spend more and more time managing his business instead of doing actual plumbing. Eventually, he hires a manager and spends most of his time on the golf course. He names the business “Super Plumbers.”
In the first example, most, if not all of the plumber’s business is personal goodwill. Take away the plumber and the business would likely fail. The plumber relies on the business as his sole source of income, which he generates mainly through his own personal efforts.
In the second example, the goodwill in the business is almost entirely enterprise goodwill. People who hire Super Plumbers may not even know any of the plumbers in the business. They may not ever have heard of the owner.
One can also imagine different gradations of personal and enterprise goodwill in a business. Only the enterprise portion of goodwill is equitably divided in a divorce.
This material should not be construed as legal advice for any particular fact situation, but is intended for general informational purposes only. For advice specific to any individual situation, an experienced attorney should be contacted.
