The valuation of marital assets is a critical component in the division of such assets incident to divorce. One of the most significant marital assets may include business interest. Valuing a business, however, can be very complicated. As with most issues in divorce proceedings, valuing a business owned by a spouse can be more than just complicated, it can be downright contentious. Disputes arising around the valuation of marital assets such as a business are very common. Furthermore, one spouse might prefer a higher valuation of the business while the other may prefer a lower valuation of the business, depending on what best serves their purposes in the equitable division of the assets arena.
One of the sticking points in determining business value as a marital asset is calculating the goodwill valuation inherent in a business’s value. You see, there are different factors that build value for a business. There is the value of business assets to consider, as well as industry data and trends. There are a variety of business variables that will need to be analyzed. One such variable is personal goodwill that the owner’s spouse brings to the business.
Goodwill Valuation in Determining Business Value as a Marital Asset
Just when you thought determining business value couldn’t get any more complicated, the divorce element of the equation throws a wrench in things. You see, while a spouse’s business may be considered a marital asset, at least in part, and thus subject to equitable division in divorce, the personal goodwill that the spouse brings into the business is a separate component. It is not considered a marital asset and needs to be separated out from the business’s value as it should not be subject to equitable division.
The value that a spouse personally brings to the business, known as “personal goodwill,” is not a marital asset and so that needs to be extracted from the overall value of the business. Personal goodwill includes things like the work the spouse does for the business and the quality of the work the spouse does. It also includes the income the business generates as a result of customers and clients who specifically seek out the skills the spouse brings to the business. Furthermore, it includes the spouse’s reputation and the value that brings to the business.
If you guessed that valuing the personal goodwill the spouse brings to a business must be difficult, you are correct. It must be attempted, however. Valuing the business as a marital asset must be based on the value of the business if the spouse no longer worked there. Once this valuation has been completed, what to do with the business can be determined.
When the business is a marital asset, there are a few things that may happen as a result of division of the marital assets. First, the spouses may agree to sell the business and divide the proceeds. Alternatively, the spouse could stay with the business and buy out the business interest awarded to the other spouse.
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