Recall from last week’s blog entry that the goodwill portion of the value of your business can be divided into two parts- personal and professional goodwill. In order to crystallize the importance of the difference between the two, let’s talk about a real-life application of the goodwill concept.
Consider the following scenario:
You are the part-owner of a professional practice (let’s take the law firm in the example from last week). You have decided that you no longer want to be married to your spouse, and, as is necessary in divorce situations, the value of your business needs to be determined.
The business valuation specialist needs to do the following, at a minimum:
• Determine the overall value of your business.
• Determine, based on your ownership percentage, what the gross value of your ownership shares is.
• Account for any discounts that might apply (Discounts for Lack of Control and Lack of Marketability are the most common, given a minority percentage of ownership shares)
• Based on a calculated overall goodwill as part of the valuation exercise, determine what percentage of the value of your ownership shares is goodwill.
• Given the previous step, determine what percentage of the goodwill is personal, and what percentage is professional.
Still with me?
Here’s the kicker…
• Subtract the value of your personal goodwill from the overall value of your ownership shares.
That’s right- in the above scenario, your personal goodwill cannot be considered when dividing assets as part of a marital asset separation exercise.
This obviously has HUGE implications if you’re considering a divorce. If you are the person who owns the business, you need to be aware that the value of your personal goodwill will be subtracted from the overall value of the business, and you might want to rest assured in that knowledge.
On the other hand, if you are the spouse who is NOT the owner of the business being valued, you need to know that you cannot count on the value of the goodwill that is directly attributable to your spouse. This will clearly be the focus of several conversations that you will need to have with your attorney/s.
Hopefully, this provides some information for you on the importance of this issue; if nothing else, remember that it is critically important in a divorce situation to 1) know the amount of goodwill present in your business, and 2) know the percentage of that goodwill that is directly attributable to you as the business owner (personal goodwill).
Next week, I will discuss the mechanics of how a valuation specialist calculates and apportions goodwill between the 2 categories.