Business Goodwill May Be Marital Property

black and white welcome and open sign to a small business

In a usual divorce case, in addition to deciding issues of custody of children and support of children or a party, parties routinely divide the property that they acquired during the marriage.  An agreement made by the parties provides them with the most flexibility possible. Property can be divided by the parties in any manner that they think is fair and reasonable.

If parties are unable to make an agreement, then they submit the issue of division of property to a court.  However, because of the laws regarding the division of marital property, a court is much more limited in what it can do.  Except for pensions and a few other assets, a court cannot transfer property from one spouse to the other.  If there is an unfairness in the way that assets are titled, a court may make a monetary award to a party.

Marital property is any property that is acquired during the marriage. Acquired means paid for using marital funds. Real property held as tenants by the entirety, unless excluded by valid agreement, is also, by definition, marital property. Marital property includes personal property (furniture, cars, etc.), businesses, retirement accounts, 401k’s, IRA’s, pension plans, financial investments, and more.

In making a monetary award, the Court follows a 3-step process: 1) The Court determines which property is marital property; 2) The Court determines the value of all marital property; and 3) After the Court determines which property is marital property and values all of the marital property, the Court may grant a monetary award after considering the 11 factors contained in the monetary award statute. Those factors include the contributions (monetary and non-monetary) of each party to the marriage, the value of all property interests of each party, the economic circumstances of each party at the time that the monetary award is made, the reason for the breakdown of the marriage, the length of the marriage, the age and health of each party, how and when specific marital property was acquired, any alimony award, and any other necessary factor. There is no specific formula for determining what is fair and how much a monetary award should be.

For certain assets, valuation of marital property can be quite complicated. For example, valuation of a business, stock options, or retirement interests can be very difficult. In those cases, an expert is usually hired to determine the value of the business, stock option, or retirement interest.

A business is usually made up of several different types of assets.  For example, the business might own a building, inventory, or tangible personal property such as desks, conference room tables, and computer equipment.  These types of business assets are termed tangible assets, because you can touch and see them.

A business might also own intangible assets, such as accounts receivable (monies owed by customer or clients for work performed by the business or goods provided by the business).  The business might also have Goodwill.

“Goodwill” is defined by the International Glossary of Business Valuation Terms as “that intangible asset arising as a result of name, reputation, customer loyalty, location, products and similar factors not separately identified.”

The old definition of “goodwill” in Maryland is “the probability that the old customers will resort to the old place.”

The more modern definition of “goodwill” in Maryland is “the advantage or benefit, which is acquired by an establishment, beyond the mere value of the capital, stock, funds, or property employed therein, in consequence of the general public patronage and encouragement, which it receives from constant or habitual customers, on account of its local position, or common celebrity, or reputation for skill or affluence, or punctuality, or from other accidental circumstances or necessities, or even from ancient partialities or prejudices.” For example, many people enjoy going to Starbucks or Dunkin Donuts because they like the coffee, other beverages, or other products that those companies offer, or because of the many convenient locations.

In Maryland, goodwill that is attributable solely to the business is marital property and is considered in determining the value of marital property and subsequently the amount of a monetary award.  This type of goodwill is referred to as business or institutional goodwill.

On the other hand, goodwill that is attributable solely to the personal reputation of the owner is not marital property and is not considered in determining a the pool of marital property.  This type of goodwill is referred to as personal or professional goodwill.  For example, goodwill that is attributable to the reputation of a lawyer who owns their own law firm is personal goodwill and is not considered marital property.

Determining the value of goodwill is complicated and usually requires that an expert be hired.  Usually, a business valuation expert, accountant, or other financial expert is retained to value the business.  There are various valuation methodologies that are used. The attorneys of Meiselman, Helfant & Wills have years of experience in handling with these types of complicated issues.  Please call us today to discuss whether your business or your spouse’s business would be considered as marital property in your divorce.

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