In a Florida divorce, a business is considered an asset and like all assets in a divorce, it must be ascertained whether that business is a marital or non-marital asset.
If the business was established before the marriage, the asset is likely to be considered non-marital and thus the property of the party who established the business. The other party is likely to say that significant contributions were made to the business during the marriage which made the business a marital asset. For example, the efforts of the other spouse as an underpaid employee or an injection of money from the other spouse could cause the court to consider the business (or part of it) to be a marital asset.
If the business was established during the marriage, the business will be considered marital property no matter what either spouse contributed to it.
After establishing whether a business is marital property or not, we must consider whether the business was owned passively or actively.
A passively owned business is one where one of the parties is not an employee and does not contribute regularly to the business in some significant capacity.
The best example of passive ownership is owning stock in a business that is publicly traded and nothing more. In such a case, the stock is divided like any other marital asset in two or one party is awarded half the value of the stock in some other form.
If the passive stock holding was purchased before marriage and was not touched during the marriage, it will be considered non-marital. Adkins v. Adkins, 650 So. 2d 61 (Fla. 3d DCA 1994)
But, if stocks were purchased before marriage and then those stocks were actively traded it may be argued that the trading was a contribution by the marriage that turned the non-marital stocks into marital stocks. This is a real stretch, though. You would have to prove that the value of the traded stocks were much higher than if the stocks were held in something like an index fund. Few people, have ever been able to achieve this. For example, Warren Buffet did not achieve this between 2012 and 2017.
If a business is not held via publicly traded stocks during a Florida divorce, then the business must be valued. This usually involves hiring a business valuation expert who carefully analyzes a business’s assets and income to ascertain a price as though the business was for sale. The income of the business is usually key because most small businesses only sell for one to three years’ worth of income. Income can be especially volatile during the long drawn-out process of a divorce. If income changes drastically during a recession or a boom, a rehearing can be allowed. Mistretta v. Mistretta, 31 So. 3d 206 (Fla. 1st DCA 2010)
If either party disagrees with the business valuation experts estimation, they are welcome to hire their own business valuation expert who can give their own testimony to the judge.
When a marital business asset is held by a party who has a participatory interest in the business (they work for the business and contribute to its success) income must be considered differently because the future income of the business is future income of the party and post-divorce income is not marital property (it can only be touched by alimony).
Therefore, when the spouse is working for the business, the only way to determine the business’s income is to deduct the spouse’s income (or a reasonable income for a similar employee if the spouse’s income is unrealistic).
A lot of time, the value of the business is almost completely in the personality, appearance, and presence of the spouse. That is not a marital asset. That is termed “goodwill” in accounting practices. For example, a friendly and amiable mechanic’s business may have a good income but could have a value that could be divided into the market price of his tools and the value of his friendly service. In such a case, only the tools would be marital property. Swann v. Mitchell, 2d 797 (Fla. 1983)
Goodwill seems intrinsic to the person. For a ridiculous example, if you grew a horn on your head during the marriage, the horn should not become marital property. But, the Supreme Court of Florida, in its wisdom, has decided that “if professional goodwill exists and if it was developed during a marriage, it is marital property…[but] that such goodwill, to be a marital asset, must exist separate and apart from the reputation or continued presence of the marital litigant…Any value which attaches to the entity solely as a result of personal goodwill represents nothing more than probable future earning capacity, which, although relevant in determining alimony, is not a proper consideration in dividing marital property in a dissolution proceeding.” Thompson v. Thompson, 576 So. 2d 267, 269-270 (Fla. 1991)
What does this mean exactly? That goodwill is with the person until it’s not. For example, If Kenny Rogers got divorced in Florida, he would keep the fame of being Kenny Rogers but his wife would get one half of the chicken chain Kenny Rogers Fried Roasters because the goodwill can be transmitted totally apart from Kenny Rogers himself to promote the roasted chicken franchise.
The solution to a spouse saying that his business is “all goodwill” is to point out that any contracts the business has include a non-compete clause. Walton v. Walton, 657 So. 2d 1214, 1216. Why would you need a non-compete clause if your business was naturally so great because of your “goodwill”? In fact, a covenant of non-compete is included in virtually every business sale and the value of every business in a divorce is determined by what the business would sell for so, in theory, no business’s value should exclude the “goodwill” of one spouse in a divorce.