Yesterday, the South Carolina Supreme Court made a major change in the way businesses are valued and divided in Family Law Litigation.
On October 7, 2015, in the case of Moore v Moore, the South Carolina Supreme Court made a major revision in the way businesses are valued by the Family Court during Family Court litigation. The Supreme Court adopted a national trend to include the issue of “enterprise goodwill” in a business valuation. Until this time, South Carolina specifically rejected enterprise goodwill as a valid part of any business valuation due to its “intangible nature”.
Until yesterday, the South Carolina only recognized “personal goodwill”. Personal goodwill is “…associated with individuals. It is that part of increased earning capacity that results from the reputation, knowledge and skills of individual people. The implied assumption is that if the individual were not there, the clients would go elsewhere.” Personal goodwill is generally associated with professional practices like a doctor’s or dentist’s practice. The logic being that but for the presence of the professional, there would be no practice. As a result, personal goodwill is not a marital asset and not subject to division in family law litigation.
Yesterday the court found that “enterprise goodwill” is another kind of goodwill that is subject to division in divorce. Recognition of enterprise goodwill has been a growing trend in Family Courts across the United States, and it has now been adopted by South Carolina. The court followed rulings from other states in determining the nature of enterprise goodwill:
Enterprise goodwill is that which exists independently of one’s personal efforts and will outlast one’s involvement with the business.” In re Marriage of Alexander, 857 N.E.2d 766, 769 (Ill. App. Ct. 2006). “Enterprise goodwill ‘is based on the intangible, but generally marketable, existence in a business of established relations with employees, customers and suppliers.'” Yoon v. Yoon, 711 N.E.2d 1265, 1268 (Ind. 1999) (quoting Allen Parkman, The Treatment of Professional Goodwill in Divorce Proceedings, 18 Fam. L.Q. 213, 215 (1984)). “[E]nterprise goodwill attaches to a business entity and is associated separately from the reputation of the owners. . . . The asset has a determinable value because the enterprise goodwill of an ongoing business will transfer upon sale of the business to a willing buyer.” Wilson v. Wilson, 706 S.E.2d 354, 361 (W. Va. 2010). Many courts have found “[e]nterprise goodwill is an asset of the business and accordingly is property that is divisible in a dissolution to the extent that it inheres in the business, independent of any single individual’s personal efforts and will outlast any person’s involvement in the business.” Yoon, 711 N.E.2d at 1268– 69 (citations omitted).
In addition, the court gave very clear guidance to the Family Courts to determine how to distinguish between the two forms of goodwill by including a chart providing examples of each. So what is the implication for families in South Carolina who are involved in the divorce process? First, more litigation and more expense. Experts will have to be retained to value not only the business, but then to separate out “personal” from “enterprise” goodwill. This is expensive- Mr. Moore spent $122,000 on his expert alone! Second, a homemaker will now not be precluded from sharing in the value of a business started by her husband during the marriage. Third, since more assets are now available to the supported spouse, it could effect the award of alimony to which he or she may be owed.
This is really a big change in our law and any person considering divorce who owns a business needs to read the Moore case.