Business Valuation

Divorcing couples that own a business together must address business ownership issues as part of the matrimonial issues, in particular the distribution of assets.
An important issue when a couple divorces is how to address the family owned business in which one of the spouses was involved before the marriage. Courts may distribute the value of owner’s share to the non-owner spouse.
The divorcing couple may also have individual equity interests in a jointly owned business and must decide whether to buy out one of the spouses or continue on together as co-owners.

The divorcing couple that owns a business together has to manage the family and business relationships simultaneously. That typically involves terminating their relationship as well.

And if one of the parties owned the business before the marriage, such as a stake in a family business, it means dissecting the interests of the divorcing spouses in a way that may implicate the interests of still others.

portrait-of-a-confident-young-man-and-woman-workin-2023-11-27-05-08-51-utc-1024x683

Portrait of a confident young man and woman working together on a farm.

In a recent case before the Supreme Court in Montana, the issue was how to deal with a distribution of property when one of the sons of a ranching family was divorced from his wife after more than 30 years of marriage.

Business Divorce Issues Related to Divorcing Business Owners

The wife claimed an interest in the limited partnership that owned the ranch and argued that it should be valued for the purposes of the parties’ property settlement and not as a family business. The limited partnership vigorously disputed that she had any interest in the business.

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The case, In re Frost, relies on the liberal provisions of state law that provide that anything owned in whole or in part by the married individuals is distributable in a divorce. The trial court rejected the claim of ownership, but the award in some ways treated the rancher’s wife as if she had. Continue reading

Enterprise goodwill is the expectation that a business has in the continued patronage by its customers, regardless of the individuals involved. Personal goodwill is the expectation of continued patronage because of an individual’s continued participation in the business.
Personal goodwill is not an asset owned by a business, but it may be acquired through contractual arrangements including employment contracts and agreements not to compete with the business after employment.
As post-employment restrictive covenants become more difficult to enforce, the equity value of small, service-oriented businesses will be lowered.
Whether the closely held business is the owner of the goodwill that produces its revenue is a critical issue when valuing the entity.

Lawyers who are prohibited by the rules of professional ethics from any restriction on competition. A real estate management company where the principals each work their own book of business. A design-build firm in which a single principle generates the vast majority of the business. An outside sales organization in which the owners divide profits based on origination.

All of these examples raise the thorny issue of who owns the goodwill that is responsible for the future earnings capacity of the business. Does the reputation of the business belong to the business, or to the individuals? As one commentator put, does the goodwill of the business go home for dinner every night?

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The issue of who owns the goodwill — the enterprise or the individuals— is likely to become even more important as the general sentiment is turning away from enforcing agreement not to compete and various states and federal agencies are taking steps restrict the imposition of agreements that restrict competition after employment. Continue reading

Articles Tagged with Business Valuation

Human Divorce, Meet Business Divorce

Divorcing couples that own a business together must address business ownership issues as part of the matrimonial issues, in particular the distribution of assets.

An important issue when a couple divorces is how to address the family owned business in which one of the spouses was involved before the marriage. Courts may distribute the value of owner’s share to the non-owner spouse.

The divorcing couple may also have individual equity interests in a jointly owned business and must decide whether to buy out one of the spouses or continue on together as co-owners.

Business Divorce Issues Related to Divorcing Business Owners

Competition and the Value of a Business are Closely Tied

Enterprise goodwill is the expectation that a business has in the continued patronage by its customers, regardless of the individuals involved. Personal goodwill is the expectation of continued patronage because of an individual’s continued participation in the business.

Personal goodwill is not an asset owned by a business, but it may be acquired through contractual arrangements including employment contracts and agreements not to compete with the business after employment.

As post-employment restrictive covenants become more difficult to enforce, the equity value of small, service-oriented businesses will be lowered.

Whether the closely held business is the owner of the goodwill that produces its revenue is a critical issue when valuing the entity.