In last week’s blog, which addressed, “How do I conduct a business valuation for my divorce in Utah?” we mentioned a few types of assets that might need to be included in your business valuation. One of those assets is “goodwill.” Goodwill, which is an intangible asset, is possibly the most contested factor in the area of business valuation in Utah divorce cases. The argument usually centers on whether the goodwill should be included in the business valuation, or completely left out. In other words, the main issue is whether the goodwill of the business should be considered marital property, subject to equitable distribution.
If there is a business involved in your Utah divorce, talk to a lawyer to find out whether goodwill and other assets should be included in your business’s value.
What is “goodwill?” Utah courts have defined goodwill, in the context of business valuations in divorce cases, as the intangible advantage a business has due to its patronage, its local position, its reputation, or other circumstances. It has been described as “the ability of a business to generate income from its continued patronage.” (Gardner v. Gardner, 748 P.2d 1076, Fn. 1 (Utah 1988).) For the sake of simplicity, it might be helpful to just think of goodwill as the business’s reputation and ability to earn money from repeat customers.
Would the business have any goodwill if the working spouse walked away and left it? In other words, is the business such that if the spouse leaves, the business’s good reputation walks out the door with that spouse? For example, if the husband is the owner of a business, and the business also has various employees and administrators such that it would carry on just fine if the husband left it, then the business itself may very well have some goodwill even if he were to leave the business, or in other words, goodwill independent of the husband. If that is the case, goodwill probably should be included in the business valuation during a divorce.
On the contrary, if the wife is the only practitioner at a dental office, and thus there are no other dentists currently employed at the office who could carry on with the practice should the wife walk away from her practice, then her dental practice may not have any goodwill independent of herself. The goodwill of a sole-practitioner, such as this wife, might not be included in the business valuation during a divorce (although other assets of the business would be, such as equipment and accounts receivable), unless the professional spouse actually sells the business. If a sole practitioner actually sells the practice during the divorce, then the other spouse is most likely entitled to an equitable share of the selling price, whether or not it looks like that selling price included goodwill. (Sorensen v. Sorensen, 839 P.2d 774, 775 (Utah 1992).)
Utah courts have specifically shown us that most sole practitioners of a professional practice, and most sole proprietor owners of a business, will not have to include goodwill in their business valuations at divorce. When “the goodwill of a sole practitioner is nothing more than his or her reputation for competency,” Utah courts have said “it would not be equitable to require [the practitioner spouse] to pay his wife part of the value ascribed to the goodwill.” (Sorensen v. Sorensen, 839 P.2d 774, 775 (Utah 1992).) The same rule also usually applies to a sole proprietor owner of a business, depending on the circumstances. If a spouse is a sole proprietor owner of a business, and “the good will of [the business] is solely attributable to [the owner spouse’s] personal, professional reputation,” then Utah courts have said it is okay to rely on the sole practitioner rule mentioned above, i.e. it is appropriate to not include any goodwill in the value of the business. (Stonehocker v. Stonehocker, 176 P.3d 476, 489 (Utah Ct. App. 2008).) Even if both spouses are technically co-owners of a business, if one spouse only had “token involvement” in the business but the other spouse behaved as if he or she were the sole proprietor owner, the latter spouse may be treated as a sole proprietor owner and thus goodwill will most likely not need to be included in the business’s value. (Stonehocker v. Stonehocker, 176 P.3d 476, 487 (Utah Ct. App. 2008).) To get even more details on these rules, check out this document prepared by our office.
Again, we emphasize that the best way to figure out whether or not your particular business or professional practice should include goodwill in its value is to talk to a lawyer. A lawyer will help you understand whether your business valuation needs to include goodwill to comply with Utah law, or whether it should not be included, thus saving you from paying a potentially much larger amount in your payout to the non-owner spouse than you might have paid otherwise.