Divorce Business Valuation: What is Goodwill and Who Gets it?

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When a Minnesota business divorce includes an ongoing business as an asset, there are many interesting and complex issues which need to be addressed. Valuing a business is an art, not a science, and there is no precise, perfect method of measuring a business's value. That said, there are various components to a business which may impact value for purposes of divorce. One important factor is whether or not to include "goodwill" and, if so, how much.

In Minnesota, the goodwill value of a business is a transferable property right and is generally defined as the amount a willing buyer would pay for a going concern above the book value of the assets. In Minnesota, judges have a significant amount of discretion to both determine what constitutes goodwill and how to address it as part of the divorce process. Generally, goodwill consists of two separate components: "institutional goodwill," which is marital property subject to a just and equitable division, and "personal goodwill," which is not included in the divisible marital estate.

In a professional practice or a business where the business owner's reputation or personal contributions to the business are a key factor in its value above and beyond the book value of the assets, a court is more likely to find that the "goodwill," or a greater portion thereof, is personal in nature and not subject to division. However, if the goodwill lies more in the business as an ongoing institution and not in any individual employee or shareholder, the goodwill is more likely to be described as institutional in nature and thus subject to division and valuation as part of the divorce.

Recently, the Court of Appeals found that a dental practice, where the sole dentist working for the practice, husband, was responsible for all of the practice's production, had no institutional goodwill. This means that there was no "premium" above and beyond the fair market value of the underlying assets themselves associated with the business, thereby reducing the value of the business overall for purposes of division in the divorce.

Cases involving businesses with significant goodwill are prime examples of cases where business valuation experts should be retained, preferably early on in the divorce process, to ascertain what, if any, goodwill exists in the business and whether that goodwill is personal or institutional. The characterization between those two different classifications can have a substantial impact on the value of the business and the division of marital assets.

Andrew M. Tatge is a partner and chair of the Family Law and Divorce Practice Group at Gislason & Hunter LLP (www.gislason.com). He regularly represents farmers, business owners, professionals, and other high income and high net worth individuals (or their spouses) in divorce and related actions. He also writes and speaks regularly on divorce issues related to the family farm and has presented a seminar on Divorce for Farmers on behalf of the National Business Institute. Andrew can be reached at atatge@gislason.com or (507) 387-1115. This information is general in nature and should not be construed as tax or legal advice.

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