A business may be marital property without every part of the business’s value being a marital asset. If a closely held business is closely identified with only one spouse, that distinction may substantially impact its value in a Florida divorce.
If one spouse founded a company, created its reputation, developed its customer relationships, and generated most of its revenue, the owner-spouse may credibly argue that there is no business without that spouse.
The non-owner-spouse, however, may argue that the company’s brand, systems, employees, customer records, contracts, and recurring business would remain even if the owner-spouse left.
Both spouses can be right. A business can possess value associated with its owner and also separate value that has become part of the business. In Florida, the distinction between these two sources of value is personal goodwill and enterprise goodwill.
Personal goodwill is usually associated with an individual. Jay Fishman, Personal Goodwill Versus Enterprise Goodwill, in BVR’s Guide to Personal v. Enterprise Goodwill 24 (5th ed. 2012). Enterprise goodwill is usually associated with the business or institution. Id.
Dr. Shannon Pratt explains that goodwill depends on “the propensity of the customer to return to the business.” Whether it is personal or enterprise goodwill depends on whether the customer comes back because of the actual individual or because of the business’ features. Shannon P. Pratt, Overview of Enterprise and Personal Goodwill, in Valuing Goodwill in Divorce: A BVR Special Report 4 (2011).
A marital estate can certainly be impacted by this distinction. Under Florida law, enterprise goodwill is a marital asset that must be valued. Fla. Stat. § 61.075(6)(a)1.f.(II). However, value that exists only because of the owner’s reputation, continued presence, and future personal efforts is personal goodwill; that value represents probable future earning capacity and is not divided as marital property. Thompson v. Thompson, 576 So. 2d 267, 269-70 (Fla. 1991).
A professional practice is not automatically personal, and a traditional commercial business is not automatically enterprise-based. A professional business, such as a law firm, may have institutionalized its workforce, contracts, reputation, and customer relationships so well that substantial value would remain after the founder departed. By contrast, a company that has facilities, employees, and substantial revenue may depend almost completely on the owner’s services and relationships.
The helpful question to ask is: If the owner left, what valuable business structure, customer relationships, and earning capacity would remain?
Florida Divorce Law Governs Goodwill In A Closely Held Business
Now, Florida’s equitable-distribution statute expressly addresses how courts must value marital interests in closely held businesses and how goodwill must be treated.
Effective July 1, 2024, the Florida Legislature amended Section 61.075 to establish a fair-market-value standard, classify enterprise goodwill as a marital asset, and address the effect of noncompetition agreements and similar restrictive covenants. Ch. 2024-237, Laws of Fla.; Fla. Stat. § 61.075(6)(a)1.f.
Florida Divorce Law Requires Fair Market Value
Under Section 61.075, “[t]he standard of value of a closely held business is fair market value.” Fla. Stat. § 61.075(6)(a)1.f.(I).
The statute defines fair market value as “the price at which property would change hands between a willing and able buyer and a willing and able seller, with neither party under compulsion to buy or sell, and when both parties have reasonable knowledge of the relevant facts.” Id.
So, the relevant inquiry is not just how much income the business produces for its current owner. The valuation must determine what an informed hypothetical buyer could truly acquire from the business.
A company may provide substantial income due to its owner working long hours, possessing unique skills, or personally controlling its most vital customer relationships. Yet, a buyer may not pay for earnings that can continue only if the former owner keeps working and generating them personally.
Florida’s statutory fair-market-value rule is consistent with the approach previously adopted by the Florida Supreme Court in Thompson for valuing the goodwill of a professional association. The court stated that fair market value is what a willing buyer would pay and a willing seller would accept, with neither acting under duress; the amount exceeding the value of the business’s other assets represents goodwill. 576 So. 2d at 270. The court explained that fair market value should be the exclusive method of measuring the goodwill of a professional association. Id.
Enterprise Goodwill Is A Marital Asset In A Florida Divorce
Under Florida law, “[i]f there is goodwill separate and distinct from the continued presence and reputation of the owner spouse, it is considered enterprise goodwill, which is a marital asset that must be valued by the court.” Fla. Stat. § 61.075(6)(a)1.f.(II).
Looking at the statutory language, the focus is on whether the goodwill exists independently of the owner spouse. This rule is with Thompson, where the Florida Supreme Court held that goodwill must exist “separate and apart from the reputation or continued presence of the marital litigant” before it may be treated as marital property. 576 So. 2d at 270.
The Thompson court explained that goodwill dependent on the continued presence of a certain person is not a marketable asset distinct from that person. Id. Value attached to the business only because of personal goodwill represents probable future earning capacity, which may be relevant to alimony, but it is not a proper consideration when dividing marital property. Id.
Thus, Florida’s distinction is not merely between professional and commercial businesses. The question is whether the disputed goodwill belongs economically to the individual or to an enterprise capable of retaining value without that individual.
A Restrictive Covenant Does Not Automatically Defeat Enterprise Goodwill
Florida law also addresses noncompetition agreements and similar restrictive covenants.
A Florida court must consider evidence that a covenant not to compete or similar restrictive covenant may be necessary when selling the closely held business. Yet, “such evidence alone does not preclude the court from finding enterprise goodwill.” Fla. Stat. § 61.075(6)(a)1.f.(III).
So, a restrictive covenant remains relevant. If a purchaser would obtain little lasting value unless the owner agreed not to compete, immediately reopen nearby, or solicit customers, that fact may demonstrate that some of the goodwill is attached personally to the owner.
To be clear, the need for a covenant is not dispositive by itself. The business can still possess enterprise goodwill through its name, recurring customer relationships, workforce, systems, contracts, location, or intellectual property.
The business must be evaluated as a whole. A court must determine what transferable value already belongs to the enterprise, rather than assume that all goodwill is personal just because a buyer would request protection from competition.
What Is Goodwill In A Florida Divorce?
Goodwill is an intangible asset that helps explain why a business may be worth more than the identifiable property and its other assets.
Goodwill Is Value Beyond The Business’s Other Assets
The Florida Supreme Court has defined goodwill as “the advantage or benefit a business has beyond the value of its property and capital.” Thompson, 576 So. 2d at 268.
In the context of professional-practice, the Thompson court adopted a definition of goodwill as the value of a practice exceeding its tangible assets, together with the tendency of patients or clients to return to and recommend the practice regardless of the individual practitioner’s reputation. Id. at 269.
For example, two businesses may own similar inventory, equipment, and other tangible assets. One business may still be worth more because it has a recognizable name, valuable contracts, recurring customers, trained employees, or efficient operating procedures that allow it to generate more earnings.
Those advantages may not appear as separate physical assets on the company’s balance sheet. Yet, they may create economic value.
Goodwill Is The Expectation Of Continued Patronage
Goodwill is often associated with the expectation that customers will keep going back to the business. In fact, Thompson described goodwill as “the expectation of continued public patronage.” Id.
Jay Fishman similarly describes goodwill as “the probability that the old customers will resort to the old place.” Jay Fishman, Personal Goodwill Versus Enterprise Goodwill, at 23.
Dr. Pratt explains that goodwill is based on “the propensity of the customer to return to the business.” Shannon P. Pratt, Overview of Enterprise and Personal Goodwill, at 4.
Whether that goodwill is personal or enterprise goodwill is dependent on whether the customer goes back because of the individual or because of something belonging to the enterprise.
Imagine that patients follow a dentist from one office to another because they trust that dentist personally. That continued patronage points toward personal goodwill.
However, imagine patients continue using a dental office because of its established staff, recognizable name, available appointments, or reputation as an institution. That continued patronage points toward enterprise goodwill.
Not Every Profitable Business Has Goodwill
Goodwill does not exist simply because a business generates substantial income. A business owner can work long hours, possess unique skills, supervise its employees, obtain almost all of the company’s customers, and handle its sales and marketing. In that scenario, the business’s earnings may substantially reflect compensation for the owner’s labor instead of an intangible asset belonging to the enterprise.
Goodwill has economic value only when the business produces earnings exceeding both a reasonable return on the assets used and adequate compensation for the work performed. Id. at 4-5.
Reasonable compensation needs to account for both the amount of time the owner works and the quality of the services the owner provides. Before the expert treats any remaining earnings as goodwill, exceptional skill must be reflected in the owner’s compensation. Id. at 5.
Consider a business that reports $600,000 in annual earnings. The owner is the company’s chief executive, operations manager, and main salesperson. If replacing those services would cost $500,000 annually, the entire $600,000 cannot be treated as excess earnings supporting goodwill. First, the valuation must account for the economic value of the owner’s labor.
Otherwise, the expert may improperly convert the owner’s future personal work into a present marital asset.
The Two Goodwill Questions
A goodwill analysis should ask two questions.
First, does economically valuable goodwill exist? Once adequate compensation for the owner’s labor is paid and a reasonable return on the company’s other assets is allowed, does the business continue to produce excess earnings or other transferable value?
This first question determines whether goodwill exists to be allocated.
Second, if goodwill exists, to whom or what does it belong? Is that value dependent upon the owner, or would it remain within the company after the owner left?
This second question determines whether the goodwill is personal goodwill or enterprise goodwill.
The owner’s hypothetical absence can be seen as a helpful “litmus test.” As Pratt puts it, goodwill is enterprise goodwill only to the extent that excess earnings would continue “in the absence of the key individual.” Id. at 6.
Did the owner transform personal effort into a business capable of functioning independently? Did the owner train employees who can keep serving customers? Could replacement management maintain operations? Would customers seek out the individual or call the company?
The answers to these kinds of questions help determine whether the intangible value follows the person or stays with the enterprise.
What Is Personal Goodwill In A Florida Divorce?
Personal goodwill is the part of a business’s value that depends on a certain individual and not on the business itself.
Florida courts distinguish enterprise goodwill from “personal or professional goodwill attributable to the skill, reputation, and continued participation of an individual,” which “is not a marital asset.” Schmidt v. Schmidt, 120 So. 3d 31, 33 (Fla. 4th DCA 2013). Thus, “the value of personal or professional goodwill must be excluded when assigning a value to a business for purposes of equitable distribution.” Id.
What Makes Goodwill Personal?
Common sources of “personal goodwill include skill, knowledge, reputation, personality, and business relationships.” Fishman, Personal Goodwill Versus Enterprise Goodwill, at 30.
To be clear, these sources do not automatically make all of a company’s goodwill personal. The question is whether the resulting value stays attached to the individual or has become institutionalized within the business.
At first, a physician’s reputation may cause patients to seek treatment from that specific physician. Yet, over time, the physician may hire other physicians, establish company-controlled referral relationships, and create a recognizable practice name.
Some of the resulting value may eventually belong to the enterprise. The expert must determine “the degree to which the enterprise relies on the attributes, reputation, or relationships of an individual,” compared with the institutionalized value that would survive the individual’s departure. Id.
Personal Goodwill Follows The Individual
If customers, clients, patients, or referral sources would follow the owner to another business, that is a strong indication of personal goodwill.
Personal goodwill arises from customers who return because of the individual, new customers who specifically seek out the individual, and referrals directed to that individual. David Wood, Personal Goodwill in Search of a Functional Definition, in BVR’s Guide to Personal v. Enterprise Goodwill 40 (5th ed. 2012).
Relevant indications of personal goodwill may include:
- the owner’s name appearing in the business name;
- customers asking only for the owner;
- specialized knowledge possessed only by the owner;
- the owner generating a substantial share of company revenue;
- many customer or supplier relationships controlled by the owner;
- an expected loss of customers if the owner left.
No individual factor automatically determines the classification. The evidence must show the extent to which the company’s earnings and relationships depend upon that person.
Personal Goodwill Is Future Earning Capacity, Not Marital Property
Personal goodwill reflects the owner’s capacity to generate future income through continued personal effort.
As the Thompson court explained, goodwill dependent upon the continued presence of a particular individual is “not a marketable asset distinct from the individual.” 576 So. 2d at 270. Value attached to a business only because of personal goodwill represents “probable future earning capacity,” which may be relevant to alimony but is “not a proper consideration in dividing marital property.” Id.
Florida appellate courts have applied this rule beyond traditional professional practices. In Soria v. Soria, the Second District explained that personal goodwill attributable to an individual’s skill, reputation, and continued participation is not a marital asset. 237 So. 3d 454, 458 (Fla. 2d DCA 2018).
This way, the owner’s future labor cannot be capitalized into a present asset and divided in the divorce.
Personal Goodwill Must Be Excluded From The Business’s Marital Value
When a business valuation is being used for equitable distribution, it must remove the value attributable to the owner’s personal goodwill.
In Schmidt, the trial court valued a retail optical business based on an expert opinion that assumed the owner would execute a covenant not to compete and also a transitional consulting agreement. 120 So. 3d at 34-35. The expert had not analyzed the business’s value without the covenant, so the Fourth District concluded the valuation “still include[d] a personal goodwill component.” Id. at 35. The court held that “[t]his personal goodwill must be excised from the value assigned to the business for purposes of equitable distribution,” reversed the valuation, and remanded for further proceedings. Id.
Likewise, King v. King held that, when making an equitable distribution, a trial court “should exclude from its valuation of a business the amount of a party’s personal goodwill,” as goodwill attributable to an individual’s reputation, skill, and continued participation is not marital property. 313 So. 3d 887, 891-92 (Fla. 1st DCA 2021). The court reversed the personal-goodwill determination because the expert’s comparison data did not give competent evidence of the owner’s goodwill, particularly where the owner was “the CEO of KIA, its largest producer of revenue, and remain[ed] involved in all aspects of the business.” Id. at 892.
Excluding personal goodwill does not always mean the entire business possesses no marital value. The company may still own inventory, equipment, contracts, intellectual property, or other assets. Additionally, the company may possess enterprise goodwill that exists separately from the owner and must be valued. Fla. Stat. § 61.075(6)(a)1.f.(II).
What Is Enterprise Goodwill In A Florida Divorce?
Enterprise goodwill is the part of a business’s goodwill that belongs to the business, and not to a particular owner.
Under Florida law, enterprise goodwill is goodwill that is “separate and distinct from the continued presence and reputation of the owner spouse.” Fla. Stat. § 61.075(6)(a)1.f.(II). Enterprise goodwill is a marital asset that must be valued by the court. Id.
What Makes Goodwill Enterprise Goodwill?
Enterprise goodwill is associated mainly with the enterprise or institution. Customers may return because of the company’s “location, staff, telephone number, facilities, reputation of the entity, or other factors.” Fishman, Personal Goodwill Versus Enterprise Goodwill, at 24.
Additionally, business goodwill relates to an enterprise’s ability to “generate earnings without the presence of any particular employee/owner or professional.” Alexis A. Dawicki & Richa Prakash, Personal Goodwill and Business Goodwill—Are They Marital Assets?, in Valuing Goodwill in Divorce: A BVR Special Report 15 (2011). Indicators of business goodwill may include location, software and databases, an assembled workforce, operating procedures, intellectual property, and a recurring customer base. Id.
The question is: Did the owner create only a successful job for that particular person, or did the owner create a business that can successfully function without that person?
Enterprise Goodwill Produces Earnings For The Business
Enterprise goodwill focuses on whether customers and revenue belong economically to the company.
Enterprise goodwill can be described in terms of earnings generated by consumers who come back because of the enterprise, new consumers who seek out the enterprise, and referrals directed to the enterprise. Wood, Personal Goodwill in Search of a Functional Definition, at 41.
For example, a lawn company may have an established reputation, trained crews, recurring customers, and standardized procedures. The founder may be actively involved. Yet, if employees can carry on completing projects and customers would continue hiring the company after the founder left, that continuing value points toward enterprise goodwill.
This also applies when customers buy a product because of its branding, quality, or convenience without even knowing who the owner of the company is. The resulting patronage belongs mainly to the business rather than to a particular person.
Enterprise Goodwill Remains After The Owner’s Departure
The essential characteristic of enterprise goodwill is that it can survive a change in ownership or management. Would customers continue using the business if the owner left? Would customer, supplier, and referral contracts stay with the company? Could employees keep providing the company’s products or services? Could replacement management maintain operations?
The owner’s departure can still disrupt the business without eliminating enterprise goodwill. A buyer does not have to receive a company that operates without any change. Rather, the question is whether meaningful intangible value would stay within the enterprise after the owner leaves.
Enterprise Goodwill Must Have Transferable Value
Florida law requires courts to use fair market value, so enterprise goodwill must reflect value that a hypothetical buyer could acquire through the business. Fla. Stat. § 61.075(6)(a)1.f.(I)-(II).
A buyer might pay for the company’s name, institutional reputation, recurring revenue, trained workforce, or operating systems. However, a buyer likely would not pay the seller for income that the seller can generate only by continuing to work personally after the sale.
Transferability does not mean every customer has to be contractually obligated to stay. Even if individual customers remain free to leave, customer loyalty, name recognition, workforce continuity, and established systems can still have transferable value.
A Florida Business Can Have Both Personal And Enterprise Goodwill
To be clear, personal goodwill and enterprise goodwill are not mutually exclusive.
For example, a customer may originally contact a business because of the owner’s reputation but stay because of the company’s employees, service, or location.
Similarly, a referral source may trust the owner personally while also referring customers to other professionals employed by the company.
So, the owner may possess personal goodwill while the business possesses enterprise goodwill. Florida law focuses on whether there is goodwill “separate and distinct” from the owner’s continued presence and reputation. Fla. Stat. § 61.075(6)(a)1.f.(II). The statute’s language allows the court to identify and value the enterprise component without treating the business as either wholly personal or wholly enterprise-based.
As Fishman discusses, the allocation between personal and enterprise goodwill is “fact-sensitive.” Fishman, Personal Goodwill Versus Enterprise Goodwill, at 30. The business’s success may depend somewhat on the owner’s services and relationships and somewhat on assets and relationships that have become institutionalized within the company.
Dr. Pratt describes a neuropsychiatric practice with more than 60 employees in which the founder possessed personal goodwill; however, much of the practice’s value had become institutionalized. Pratt, Overview of Enterprise and Personal Goodwill, at 7-9. Other professionals had created their own patient relationships, key employees were subject to noncompetition agreements, the practice held company-owned hospital contracts, and management could operate with little involvement from the founder. Id.
Overall, the owner’s importance does not necessarily create an all-or-nothing result. The question is not whether the owner matters. The question is how much of the company’s value would leave with the owner and how much would stay within the enterprise.
Goodwill Is Not Limited To Solo Professional Practices
Florida’s goodwill rules are not limited to traditional professionals. Although Thompson was about a law practice, the Florida Supreme Court agreed that the distinction applies whether the owner is “a professional or a traditional businessman.” 576 So. 2d at 269. The owner’s skill and reputation do not become enterprise goodwill simply because those attributes create revenue through a business entity. Id.
Since then, Florida appellate courts have applied the distinction to a retail optical business, a biomedical consulting company, and an insurance agency. Schmidt, 120 So. 3d at 33-35; Soria, 237 So. 3d at 458-60; King, 313 So. 3d at 891-92.
A Professional Practice Can Possess Enterprise Goodwill
A professional practice is not automatically dependent on the professional spouse.
A medical practice, dental office, law firm, or accounting firm may have enterprise goodwill if it has value separate from the continued presence and reputation of a particular professional. Thompson, 576 So. 2d at 270.
Thompson held that if a law practice has value exceeding its tangible assets and pending cases that is “separate and distinct from the presence and reputation of the individual attorney,” the goodwill accumulated during the marriage should be viewed as a marital asset. Id. The existence and value of that goodwill must be determined on a case-by-case basis with the help of expert testimony. Id.
A Commercial Business Can Possess Personal Goodwill
Similarly, a commercial company does not automatically possess just enterprise goodwill.
In Soria, the husband founded a company “for the purpose of consulting with doctors to assist them in bringing their ideas to market.” 237 So. 3d at 456. He testified that he was “a crucial part of any value that the business may have” and that the business “could not function without him.” Id.
The Second District reiterated that “[g]oodwill, to be a marital asset, must exist separate and apart from the reputation or continued presence of the marital litigant.” Id. at 459 (quoting Thompson,576 So. 2d at 270). The court reversed and directed the trial court to “determine the fair market value of ABC” while “taking into account all of the company’s assets and liabilities.” Id. at 460.
In all, the type of business does not decide the type of goodwill. The question is whether the disputed value is attached to a person or has turned into an asset of a transferable business enterprise.
How Do Experts Separate Personal Goodwill From Enterprise Goodwill?
Separating personal goodwill from enterprise goodwill requires more than defining certain features as either personal or institutional. The expert has to connect the business’s financial value to the people, relationships, assets, and systems that produce its earnings.
The Expert Must Determine Fair Market Value
Florida courts must value a marital interest in a closely held business using fair market value. Fla. Stat. § 61.075(6)(a)1.f.(I). Fair market value is the price at which the property would change hands between an informed and willing buyer and seller, with neither under compulsion to complete the transaction. Id.
The expert should start with identifying what the hypothetical buyer would acquire.
In Thompson, the Florida Supreme Court stated that the amount a willing buyer would pay above the value of the business’s other assets represents goodwill. 576 So. 2d at 270. It further stated that actual comparable sales are not necessary when a reliable and reasonable basis otherwise exists for the expert’s opinion. Id.
The Expert Must Determine Whether Economically Valuable Goodwill Exists
Next, the expert should decide whether the business possesses goodwill at all.
Goodwill possesses economic value if the business generates earnings exceeding both a reasonable return on its other assets and adequate compensation for the labor performed. Pratt, Overview of Enterprise and Personal Goodwill, at 4-5.
This means the expert must identify all of the services performed by the owner and determine what the business would have to pay replacement workers to perform similar services. An owner may serve as chief executive, salesperson, manager, and technician.
Before treating the remaining earnings as evidence of goodwill, the expert should account for all of the responsibilities. Otherwise, ordinary compensation for the owner’s future work may be improperly converted into a present business asset.
The Expert Must Identify The Sources Of Goodwill
Next, the expert must identify which attributes generate it.
Personal attributes may include the owner’s reputation, personality, skills, knowledge, personal relationships, and individual revenue production.
Enterprise attributes may include the company’s marketing presence, reputation as an institution, location and name, trained workforce, customer records, operating procedures, institutional systems, and recurring revenue.
David Wood explains that an attribute analysis may help “challenge, confirm, and communicate the valuator’s opinion.” David Wood, Goodwill Attributes: Assessing Utility, in BVR’s Guide to Personal v. Enterprise Goodwill 87 (5th ed. 2012).
Yet, an expert should not simply count the number of personal and enterprise factors. Wood cautions that “[t]here are no hard and fast rules in attribute determination.” Id. at 96. One customer relationship controlled by the owner can be more economically important than several smaller operating procedures belonging to the company.
The expert must decide how much value each attribute actually contributes to the business.
The Expert Should Consider What Happens If The Owner Leaves
The owner’s potential departure is one of the most helpful ways to distinguish the two forms of goodwill.
Pratt describes the relevant “litmus test” as whether the business’s excess earnings would continue “in the absence of the key individual.” Pratt, Overview of Enterprise and Personal Goodwill, at 6.
Importantly, a business can lose some revenue because of the owner’s departure and still retain substantial enterprise goodwill.
The Expert Should Interview The Owner And Other Key Participants
Just reviewing financial records may not be enough to reveal why customers return or how the company generates business.
Interviewing the owner is often “the best way to get at the personal component of goodwill.” Alina V. Niculita, Angelina McKedy & Kimberly Linebarger, How to Distinguish Personal Goodwill From Enterprise Goodwill, the Key Person Discount, and Noncompete Agreements, in BVR’s Guide to Personal v. Enterprise Goodwill 102 (5th ed. 2012).
The interview can address the owner’s reputation, specialized knowledge, duties, health, customer loyalty, referral sources, proprietary processes, contractual relationships, and expected effect of the owner leaving. Id. at 103-04.
Other witnesses, such as employees, managers, customers, and referral sources, may have different information about how dependent the business is on the owner. Thus, the expert should not rely exclusively on the owner’s characterization.
Comparable Transactions Must Be Actually Comparable
Market data may be helpful when the expert truly understands the businesses and transactions being compared.
In King, the expert relied on insurance-agency transactions from the DealStats database and used the reported values of noncompetition agreements as a proxy for the husband’s personal goodwill. 313 So. 3d at 890-92. The problem, though, is that the expert lacked “specific knowledge about the particulars of the insurance businesses” and did not disclose whether their owners sold insurance, how involved they were in their companies, or “anything about the day-to-day operations of those businesses.” Id. at 892. Many of the transactions did not occur in Florida, and some dated back almost twenty years. Id.
The First District held that the selected transactions and reported noncompetition values did not give competent evidence of the husband’s personal goodwill. Id.
An expert using comparable transactions should evaluate whether the compared businesses had similarly involved owners, customer relationships, or operating systems.
What Evidence Proves Personal Or Enterprise Goodwill?
Goodwill is intangible, so the classification usually depends on evidence showing why the business earns money and what would happen if the owner left.
Evidence About The Owner’s Role
The owner’s testimony might explain the services the owner performs, the owner’s involvement in operations, which customers and referral sources deal personally with the owner, the amount of revenue generated by the owner, and what the owner believes would happen upon departure.
The owner’s testimony needs to be compared with calendars, billing information, payroll records, sales records, customer communications, and other information obtained through financial discovery in a Florida divorce.
Customer, Patient, And Referral Evidence
Customer behavior can provide some of the best evidence of where the goodwill resides.
Relevant evidence may include the number of customers who work only with the owner, whether customers ask for the business or the individual, the source of new business, and customer-retention data.
Referral information can be particularly important in service and professional businesses. If referral sources direct work to a certain person and would follow that person somewhere else, the relationship supports personal goodwill. If referrals are made to the company and distributed among multiple employees, the relationship supports enterprise goodwill.
Additionally, revenue should be evaluated by employee, customer, product, and referral source because it can show whether the company’s income is concentrated around the owner or distributed across the enterprise.
Operational And Institutional Evidence
Evidence supporting enterprise goodwill may include training materials, operating procedures, a workforce capable of keeping up operations, customer and supplier databases, company-owned contracts, and a business name or brand separate from the owner.
Dawicki and Prakash identify location, software and databases, an assembled workforce, operating procedures, intellectual property, and a recurring customer base as potential components of business goodwill. Dawicki & Prakash, Personal Goodwill and Business Goodwill—Are They Marital Assets?, at 15.
The existence of those features does not necessarily prove enterprise goodwill. The evidence must show that they truly generate continuing earnings or transferable value.
Transaction And Market Evidence
Transactions might reveal what buyers actually pay for particular business assets and what conditions are necessary to preserve the business’s value.
Documents may include offers to purchase the company, prior purchase agreements, buy-sell agreements, shareholder agreements, employment agreements, and consulting agreements.
A previous transaction should not be accepted uncritically. The expert must decide whether it occurred at arm’s length, whether the economic circumstances are still comparable, and whether the seller kept working after the sale.
Restrictive Covenants And Transition Agreements
A noncompetition, nonsolicitation, or transitional consulting agreement might provide evidence about how much value depends on the owner.
Under Florida law, the court must consider evidence that a restrictive covenant may be required upon the sale of a closely held business. Yet, “such evidence alone does not preclude the court from finding enterprise goodwill.” Fla. Stat. § 61.075(6)(a)1.f.(III).
The expert needs to determine why the agreement is required. A buyer may request ordinary protection against competition even when the business possesses substantial independent value. However, a valuation that requires the owner to continue working, introduce all of the customers, and refrain from competing may be relying on value that has not yet been transferred from the individual to the enterprise.
The expert’s valuation in Schmidt “assumed and required” that the husband execute both a noncompetition agreement and “some type of transitional consulting agreement.” 120 So. 3d at 34-35. The expert admitted that he “had not performed an analysis as to the value of the business” if the husband did not sign the noncompetition agreement. Id. at 35. Since the valuation required that agreement, the Fourth District found that it “still include[d] a personal goodwill component” that “must be excised from the value assigned to the business for purposes of equitable distribution.” Id.
The Expert’s Assumptions Must Match The Evidence
At the end of the day, a goodwill valuation is only as reliable as the facts that support it.
An expert needs to identify all important assumptions, including the owner’s expected departure date, replacement compensation, level of transition assistance, expected revenue loss, customer-retention rate, and effect of any restrictive covenant.
Then, the evidence must support those assumptions. An expert should not assume that customers will stay when the owner is in control of every customer relationship. Similarly, an expert should not assume that all customers will leave when prior records demonstrate that the company operated well without the owner.
The Bottom Line About Personal Vs. Enterprise Goodwill In A Florida Divorce
Personal goodwill and enterprise goodwill undoubtedly can substantially impact the value of a closely held business in a Florida divorce. Florida law states that enterprise goodwill is a marital asset that must be valued by the court when it exists separately from the owner spouse’s continued presence and reputation. However, personal goodwill reflects value attributable to the owner’s reputation, skills, relationships, and future participation and is not divided as marital property.
A business might contain both forms of goodwill. Determining whether goodwill exists, how much goodwill exists, and how it should be allocated requires an examination of the owner’s responsibilities, compensation, customer and referral relationships, workforce, operating systems, contracts, restrictive covenants, and available market evidence.
Each goodwill valuation will turn on its own facts. The question asks: If the owner left, what valuable business structure, customer relationships, and earning capacity would remain with the enterprise?
Russell D. Knight is a Naples divorce and family law attorney who has practiced law since 2006 and has been licensed to practice law in Florida since 2018. His Florida practice focuses on divorce and family law, including matters involving the division of marital assets and closely held business interests.
CASES, STATUTES, AND OTHER SOURCES REFERENCED IN THE PERSONAL GOODWILL VS. ENTERPRISE GOODWILL IN A FLORIDA DIVORCE ARTICLE
Fla. Stat. § 61.075(6)(a)1.f. — Valuation Of Marital Interests In Closely Held Businesses
Chapter 2024-237, Laws of Florida — Equitable Distribution Of Marital Assets And Liabilities
Thompson v. Thompson, 576 So. 2d 267 (Fla. 1991)
Schmidt v. Schmidt, 120 So. 3d 31 (Fla. 4th DCA 2013)
Soria v. Soria, 237 So. 3d 454 (Fla. 2d DCA 2018)
King v. King, 313 So. 3d 887 (Fla. 1st DCA 2021)
Jay Fishman, Personal Goodwill Versus Enterprise Goodwill, in BVR’s Guide to Personal v. Enterprise Goodwill 23-33 (5th ed. 2012)
David Wood, Personal Goodwill in Search of a Functional Definition, in BVR’s Guide to Personal v. Enterprise Goodwill 34-42 (5th ed. 2012)
David Wood, Goodwill Attributes: Assessing Utility, in BVR’s Guide to Personal v. Enterprise Goodwill 87-100 (5th ed. 2012)
Alina V. Niculita, Angelina McKedy & Kimberly Linebarger, How to Distinguish Personal Goodwill From Enterprise Goodwill, the Key Person Discount, and Noncompete Agreements, in BVR’s Guide to Personal v. Enterprise Goodwill 101-110 (5th ed. 2012)
Shannon P. Pratt, Overview of Enterprise and Personal Goodwill, in Valuing Goodwill in Divorce: A BVR Special Report 4-9 (2011)
Alexis A. Dawicki & Richa Prakash, Personal Goodwill and Business Goodwill—Are They Marital Assets?, in Valuing Goodwill in Divorce: A BVR Special Report 15-18 (2011)
Frequently Asked Questions About Personal And Enterprise Goodwill In A Florida Divorce
What Valuation Standard Applies To A Closely Held Business In A Florida Divorce? Florida uses fair market value, which means the price an informed, willing buyer would pay an informed, willing seller when neither one is compelled to complete the transaction.
Does A Profitable Florida Business Necessarily Have Goodwill? No, a business might generate substantial income due to the owner’s labor, skills, and long hours. Goodwill exists only when the business has value beyond its identifiable assets and appropriate compensation for the owner’s work.
Can A Commercial Business Have Personal Goodwill? Yes, personal goodwill is not limited to professional practices.
What Happens If A Business Valuation Includes Personal Goodwill? Personal goodwill has to be removed from the value assigned to the business for equitable distribution. A Florida appellate court can reverse a valuation that improperly treats the owner’s future earning capacity as a marital asset.
What Evidence Shows That Goodwill Would Remain After The Owner Leaves? Evidence may include independent management, trained employees, company-owned contracts, recurring customers, operating systems, transferable records, intellectual property, and a business reputation separate from the owner.
