Personal Goodwill in Divorce Valuations

Whenever a business interest is one of the assets in a divorce action it becomes crucial to get a professional business valuation. In a divorce setting certain rules and legal precedents may apply. One example is the concept of personal goodwill. Personal goodwill in a business is excluded from the marital estate and is not divisible between the spouses. This can have a huge impact in a divorce case.

Personal goodwill is the portion of the value of the business that would not exist apart from the skills and reputation of the individual business owner. One way to think of it is: if the business owner died suddenly, would the value of the business change? If so, then there is probably some element of personal goodwill involved. If not, then there is no personal goodwill and the entire value of the business is divisible between the two parties.

One of the foundational legal precedents for personal goodwill is the court case Nail v Nail (486 S.W.2d 761, 764 (Tex. 1972)). In that case, Dr. Nail was an opthalmologist who owned a solo practice. His spouse asked for one half of the total value of the business. The court said that the value of the business was entirely dependent on the individual skill and experience of Dr. Nail and that without him the business had no value except for the value of the tangible assets, which was minimal. This meant that essentially all of the value of the practice was not divisible and so the spouse was not entitled to any share of it.

Going through a divorce is stressful enough for a business owner, but you could be at a huge disadvantage if you don’t know the rules. If you are a business owner going through a divorce, or you know someone else who is, be sure you talk to a Business Valuation Professional. It could mean a huge difference in financial impact.