Impact Of A Non-Compete Agreement In Business Valuation During Divorce

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For business owners going through divorce, the value of the business is often a source of contention for the two parties.  The value of goodwill is always debatable, even if you are selling a business to a 3rd party that has no involvement in the divorce matter.  A recent Florida Court of Appeals case (Schmidt v Schmidt, July 2013) gave some additional clarification surrounding the value of goodwill as it relates to a non-complete agreement and equitable distribution during divorce.

Goodwill is an accounting value placed on the business that exceeds actual tangible assets such as equipment, patents, bank accounts, etc.  Many business do have goodwill which comes from the businesses reputation, the firms processes and skills, the workers, etc.  This legal case discussed how goodwill can be broken down into enterprise and personal goodwill and ruled that while enterprise goodwill can be part of equitable distribution, personal goodwill cannot.

Enterprise vs Personal Goodwill

The case explained enterprise goodwill as value “which exceeds its tangible assets and represents the tendency of clients/patients to return to and recommend the practice irrespective of the reputation of the individual practitioner.  Personal goodwill was “goodwill attributable to the skill, reputation, and continued participation of an individual.

Assumption Of Personal Goodwill In A Non-Compete Agreement

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The difference between enterprise goodwill and personal goodwill can be subtle, but is important.  In this divorce case, the business included a retail optical store and the CPA which testified to the business valuation in Court stated that the value was based on the husband signing a non-compete agreement.  The District Court ruled that because the value given required that the husband had to sign a non-compete agreement, there was a personal goodwill placed within the business valuation.  Consequently, it ruled the trial Court had valued the business improperly because personal goodwill was part of the valuation.  The result was that the Court incorrectly divided the couple’s marital assets.

The Bottom Line

While enterprise goodwill can be divided in a divorce through equitable distribution, the Court cannot divide the value of personal goodwill.  If you are involved in a divorce and you own a business, make sure you are comfortable with the value placed on your business.  If you’re not, discuss it with your attorney and CPA.