Lack of Expert, Evidence Foils Business Valuation in Divorce
Personal Goodwill versus Enterprise Goodwill
When a business is an asset in a Pennsylvania divorce, the court needs detailed information — and often a business valuation in divorce — to perform equitable distribution. The information must be presented in court in an effective way. Not having a business valuation or detailed information can lead to unexpected results. Recently, in Sweeney v. Sweeney, No. 2164 EDA 2015 (August 30, 2016) (non-precedential), the Superior Court confronted a divorce case in which the husband operated a software business known as Roofing Projects.com. The wife did not choose to hire a forensic accountant to prepare a business valuation. Husband also declined to hire an expert, claiming that the value of the business was dependent upon his personal involvement; and since a buyer would be unable to run the business without him, the business had no value. The Montgomery County trial court, having no other evidence or information, had to agree with husband’s position.
Wife filed an appeal, arguing that (a) she was not given enough time (32 months) to complete her investigation and discovery; and (b) the trial court committed an error by assigning $0 value to husband’s business. The Superior Court affirmed the decision, holding that sufficient time was provided for discovery, and the trial court acted on the only information that was provided.
The outcome of this case might be unremarkable except for the husband’s weak reliance on “personal goodwill” — the idea that his business had no value because it was solely dependent on him. Goodwill is the added value that a buyer will pay to purchase a business, beyond the actual value of its assets and liabilities. Many businesses have goodwill because they have developed a customer base, efficient procedures, or a strong reputation. And, under Pennsylvania law, goodwill is usually included in the value of marital property — if it can be transferred to someone who buys the business. On the other hand, if goodwill is closely intertwined with the skills and reputation of a particular person — like a physician or artist — then the goodwill is non-transferable. This “personal goodwill” is excluded from the value of a business in divorce.
In Sweeney, the business was a software company selling web site design and software to manage bidding on commercial roofing projects, and to monitor roofing condition. The opinion mentioned nothing about the owner (husband) that would lead one to think he was indispensable. Perhaps he was a software developer or experienced in bidding roofing jobs, but it’s not hard to find someone with those skills; and most customers don’t care much about who writes their software or bids their construction project. A buyer might purchase this company and sell its products without any further involvement of the prior owner (husband). If so, then the goodwill of this company would be transferable to the buyer. The transferable goodwill (known as “enterprise goodwill”) would add to the value of the company in a divorce.
So, why did the Superior Court arrive at its result? The Sweeney case is a cautionary tale. Going to court without the right evidence or strategy can lead to unexpected results. When considering a divorce involving business interests, it is important to choose lawyers and experts with experience in complex financial matters. The partners of Pollock Begg have been resolving business valuation issues in divorce for decades. We perform discovery to obtain critical evidence and work closely with experts who can present it effectively. Call our offices to speak with one of our partners about your business valuation in divorce.
Brian C. Vertz is a partner in Pollock Begg with decades of experience in routine and complex child support, divorce and tax-related family law cases. Author of the legal reference book “Frumkes & Vertz on Divorce Taxation,” Brian is a sought-after speaker, course planner and the author of the 2017 Family Law Update for the Pennsylvania Bar Institute. Brian is a fellow of the International Academy of Family Lawyers as well as the American Academy of Matrimonial Lawyers.