'Goodwill Hunting' for Equity: The Florida Supreme Court's Unintended Result of the Thompson Case.

Author:Beebe, Abigail
Position:Part 1
 
FREE EXCERPT

What happens in a dissolution of marriage when a Florida court is tasked to value and distribute a business entity? The business entity constitutes a marital asset and is subject to F.S. [section]61.075. In Florida, when one spouse is the owner of a business and the court is asked to determine whether and to what extent there is a marital component, the parties, lawyers, and the court must deal with the existence of "personal goodwill" in determining the value of that entity for equitable distribution.

Personal goodwill in Florida is discounted and typically excluded from the marital estate. (1) "Personal goodwill" generally has been defined as any value that attaches to the entity solely as a result of one's reputation or skill, representing nothing more than probable future earning capacity, and is not proper in the consideration of dividing marital property. (2) It is personal goodwill that Florida courts hold is "not proper in the consideration of dividing martial property," rather, it is deemed an intangible asset arising from the unique skills, efforts, personality, and reputation of the individual. (3)

Personal goodwill is the opposite of enterprise goodwill (4) and is excluded from the marital estate because of an assumption that such an asset containing the goodwill component is not saleable, unlike other corporate assets that exist separate and apart from the skill set of the individual. "Enterprise goodwill" is deemed an intangible asset that arises from unique advantages of the business, such as its location, employees, strategy, and brand name recognition. (5)

For many years, Florida courts have equated personal goodwill to a covenant not to compete (or a transitionary services agreement), finding the goodwill value of a business arises because the owner spouse signs a noncompete agreement or a requirement that they remain in the business post-sale. (6) In a Florida court, value is predicated on the assumption of a noncompete or transitory consulting agreement as reflective of "personal goodwill." This causes valuation experts, when tasked to value a business, to assume that a covenant not to compete will not be part of the transaction for purposes of valuation for equitable distribution.

Florida cases have created significant challenges for valuation experts causing inequitable outcomes for the parties involved in a dissolution of marriage. (7) Throughout Florida, even the most significant, real-world transactions of a closely held business require covenants not to compete, thus, leaving experts unable to utilize the market-value approach to support the finding of personal goodwill, even when personal goodwill is nonexistent in the sale. (8) Valuation experts are precluded from using any valuation method that is predicated upon the assumption of a covenant not to compete, as Florida caselaw says, which automatically indicates some component of personal goodwill. (9)

The resulting issue is experts using the "net asset value" approach in conducting their business valuations because there is no other "reliable" method to support a goodwill value, which does not include a covenant not to compete. This is the case even when intangible value exists completely separate from the individual's reputation, ultimately resulting in economic inequities for the nonowner spouse, particularly when alimony is not a major factor or any factor at all. In Florida dissolution of marriages, it is professionals, including attorneys, who often use this exact reality to develop and present highly favorable monetary outcomes for the property owner spouse, leaving the nonowner spouse with very little economic potential from that marital asset. The result is an unequal distribution, a windfall, to one spouse in the distribution of "marital assets."

The purpose of this article is an overview of the caselaw as it relates to personal goodwill in a Florida marital dissolution to discuss the challenges faced by experts directly caused by the caselaw as it stands today. This article demonstrates that by equating personal goodwill to a covenant not to compete, economic injustices are likely to occur. When a Florida court is trying to value a business entity at close to tangible net asset value, awarding one party the asset, which likely is substantially greater than net book value, and giving the other only the net book value of that asset in equitable distribution, the retaining spouse is often left with a windfall. This could manifest immediately if one spouse capitalizes on the true fair market value of that business postdivorce. This may be as simple as an immediate sale of that business with a "covenant not to compete." Clearly, part of this injustice is a function of the amount of goodwill that can be realized by the owner spouse with a covenant not to compete.

The Law on Personal Goodwill in Florida

In 1991, the seminal case dealing with "goodwill" is the Florida Supreme Court case of Thompson v. Thompson, 576 So. 2d 267 (Fla. 1991). The case involved the valuation of a personal injury and medical malpractice law firm. (10) The central issue was whether the goodwill of the professional association should be factored in determining the association's value for purposes of equitable distribution. (11) Applying the principles of equity and many other states' various approaches, the Florida Supreme Court recognized that professional goodwill, if developed during...

To continue reading

FREE SIGN UP