THE MCMILLIAN LAW FIRM REPRESENTING CLIENTS IN CHARLESTON, SC AND SUMMERVILLE, SC IN ALL CASES CONCERNING FAMILY LAW AND DIVORCE
One of the more common yet complicated matters that come up in a divorce is how to "value" a small business. Everything from the type of business (services vs. sale of goods), the business structure (corporation, LLC, or sole proprietorship), and the liquidity of the business (is the business the type that can be sold and converted to cash) can determine the real value of a business subject to equitable division.
Another consideration is the actual ownership of the business and who contributed to the daily operations. Is the business a small business owned by the husband that wife supported in a administrative role. Is it a corporation that wife serves as President and handles all daily operations for yet the husband as gifted 45% of the stock upon its creation. All questions that make equitable division an area of a divorce action that require precision in valuation.
SOUTH CAROLINA SUPREME COURT: MOORE VS. MOORE
The South Carolina Supreme Court went into detail about the valuation of a business in its October 7, 2015 opinion in the matter of Moore vs. Moore. In the interest of brevity, the Moore case involved a business that was formed as a corporation in Charleston County whereas the wife owned 51% of the stock of the corporation and the husband owned 49% of the stock of the corporation. With the exception of a brief period of medical leave following a difficult pregnancy, the Wife was the driving force behind all of the business operations including product promotion, hiring, management, training, and securing contracts for the sale of goods. The Supreme Court opinion event comments that the Husband, while on occasion may contributing a thought or idea to operations, left the bulk of any implementation and action on business items to the Wife, who demonstrated a superior work ethic.
WHAT IS "GOODWILL VALUE" OF A BUSINESS
The valuation of a business is in very simplified terms the combined worth of its actual assets (accounts receivable, inventory, cash, equipment, etc.) and its goodwill value. The goodwill value of a business is the value attached to factors such as trade name, location of the business, established customer base, and the like that would compel someone to purchase the business for a value in excess of the worth of the actual assets.
- For example, if Wal Mart had actual assets in all of its stores that equaled $1 Billion Dollars, they would claim that the business is still worth $3 Billion Dollars because a buyer is buying the Wal Mart name, and the already built in customer base, and the convenient locations, etc. The extra $2 Billion Dollars would be the "goodwill value."
WHEN "GOODWILL" BECOMES A MARITAL ASSET SUBJECT TO EQUITABLE DIVISION IN SOUTH CAROLINA
The Supreme Court speaks at length about the difficulty of establishing goodwill value in a business that is subject to marital litigation. It is a collision of two very distinct and diabolically opposed principles. It is a collision between the principles of family court, who are ultimately bound by rules of equity and even-handedness (is it fair) versus the hard and fast rules of valuation and accounting, where the numbers are always the numbers, and the numbers never lie. The numbers are not concerned with morality or fairness, they only reflect the quantity of what it is. So the dilemma is . . . what is fair but also a most accurate reflection of the true value of a business.
The problem is further complicated in marital litigation because in additional to trying to value goodwill value (what the business is worth beyond its inventory and assets), how is the business valued when there is no identifiable buyer or seller for the business. How much is the value of the business manipulated by knowing that in a vast majority of the cases, the value of the business as a marital asset is going to be calculated in the context of knowing that one spouse is going to "buy off" the other spouse and keep operating the business.
THE TWO TYPES OF "GOODWILL": PERSONAL VS. ENTERPRISE
The South Carolina Supreme Court further dives into the business goodwill analysis by commenting that the law generally recognizes two types of "goodwill" value in a business: personal and enterprise. What is the difference between these two types of "goodwill?"
- Personal Goodwill is the value added to a business by the personal efforts and value added services provided by a specific person that is so unique to the individual that the absence of the person in the business operations would not allow the value to be retained in future operations of the business.
- Enterprise Goodwill is the value added to a business that exist independent of one's personal efforts. This is the added value of a business that will move forward with the business after the involvement of a specific person has ended. The value of enterprise goodwill is based upon intelligible but marketable factors such the business' relationship with employees, the general public, suppliers, contractors, and customers.
In short, the difference between "personal goodwill" and "enterprise goodwill" is that enterprise goodwill is value added to the business that is separate from any identity of the individual owners.
- For Example: a law firm or an "service" based businesses often have personal goodwill value since the future earning capacity of the business is usually directly tied to the earning capacity of the individual service provider (i.e. the lawyer). Whereas commercial enterprises where the identity of the company is distinct from any specific owner has value added through enterprise goodwill.
WHY IS THE TYPE OF BUSINESS "GOODWILL" VALUE IMPORTANT IN A DIVORCE?
The reason this topic is important in marital litigation is simple: the Moore case established that enterprise goodwill, or the added value of business that is separate from the reputation of its owners (personal goodwill) is a quantifiable asset that is subject to equitable division in a divorce proceeding. In English . . . A business that has an increased worth due to "enterprise goodwill" therefore has more assets that are now subject to equitable division by the Family Court . . . your spouse will get a bigger cash out from your business upon a splitting of the marital assets!!
The Supreme Court opinion in Moore even provided a short but specific list on how to determine if the "goodwill" value in a business is personal or enterprise:
- Central Issue: can the business generate revenue from continued patronage without the current owner's participation?
- Personal Goodwill Indicators:
- Usually a small business
- No employment agreement between company and employee / owner
- Service based company where personal service of the employee / owner is marketed
- Only employee / owners own the company
- Sales are almost wholly dependent on owner's relationship with customers
- Owner / employee has the personal relationship with suppliers and contractors
- No significant capital investments
- Enterprise Goodwill Indicators:
- Larger business with formalized structure
- Owner / employee has formal employment agreement with company
- Business not reliant on personal services
- Business has significant capital investments
- Company has more than one owner, some of which are not employees
- Company sales result from sales force, sales contracts, and other company owned intangibles
- Company has supplier contracts and formalized procurement, payment systems, business systems, copyrights, etc.
OWN YOUR OWN BUSINESS AND ANTICIPATE MARITAL LITIGATION IN CHARLESTON, SC AND SUMMERVILLE, SC?
Protect the business and livelihood that you have worked so hard to create. Please contact me at The McMillian Law Firm and let's discuss how a potential separation or divorce will effect your business operations and your ability to stay operational. The initial consultation is free and it would be my pleasure to discuss the law and help you navigate the nebulous nature of business valuation in marital litigation.
If you live in Charleston, Mt. Pleasant, Summerville, Moncks Corner, West Ashley, Folly Beach, Walterboro, North Charleston, or any of the other fine communities of the South Carolina Low Country, please contact The McMillian Law Firm today to schedule your free consultation. Do not walk this path alone, allow me to be your advocate at your side and assist you in getting your life back on track.