When valuing a small or family-owned business in a Virginia divorce, parties need to be aware of the concept of “goodwill.” Goodwill is divided into two main types: personal goodwill and professional goodwill. Though sometimes hard to tease apart, once a judge determines how much of each type of goodwill is contributing to the value of a divorcing-spouse’s business, that ruling can be monumental to the financial well-being of the husband and wife.
Personal goodwill, also known as “reputational goodwill,” is separate property. It is not divisible and distributable by the courts in a Virginia divorce. Personal goodwill is dependent on an individual’s continued presence and efforts within the company. Examples of personal goodwill are:
- Reputation in the community
- Business relationships built due to personal attributes
- Knowledge (unique possession of information and/or unique ability to analyze information)
Professional goodwill, also known as commercial goodwill, is marital property. It is divisible and distributable by the courts in a Virginia divorce. Professional goodwill is attributable to the business itself, not an individual owner. Professional goodwill is independent of the presence or reputation of any particular individual. This type of goodwill is fair game for equitable division in divorce. Examples of professional/commercial goodwill are:
- General services provided
- Customer data base
- Business characteristics not based on individual contributions/attributes
The concepts and defining characteristics of personal versus professional goodwill can be very subjective. Voluminous amounts of money are spent in Virginia courts every day as attorneys and their experts work to convince judges of the soundness of their arguments. A judge’s decision in this regard can have a vast impact on the divorcing couple’s financial distribution.
Couple’s, however, do not have to leave their financial well-being in the hands of a judge who might be viewing wildly divergent expert reports on the impact of both types of goodwill on the value of a family-owned business. Moreover, divorcing couple’s do not need to even agree with Virginia’s common view of professional (divisible) and personal (not divisible) goodwill in terms of how their property is divided in a divorce. They just need to be aware of this way of thinking so that, when settling their case, they can make informed decision in relation to both the law and their unique set of personal and family circumstances.
By Steven Seril, Mediation, Marketing & Research Assistant