Among the most challenging assets to value for purposes of division in a Florida divorce are businesses, including professional practice. A professional practice may provide the bulk of a couple’s income during the marriage and be the most valuable asset divided in the divorce. But unlike an investment or bank account, the value of which lies in its tangible, countable assets, the value of a professional practice can be more difficult to discern. In addition to the fact that there are a number of valuation models for a practice’s tangible assets, there is the problem of valuing the goodwill in a practice, which can be difficult to quantify.
What is Goodwill in a Professional Practice?
Under Florida law, goodwill in a professional practice can be considered a marital asset, subject to division in divorce. With respect to a law practice, for example, the value of the goodwill in the practice might be the monetary value of the practice, above and beyond its tangible assets (furnishings, office equipment, real estate) and separate from the reputation of any particular attorney. To the extent goodwill in such a practice was built up during the marriage, increasing the value of the practice, it is a divisible marital asset.
Whether goodwill exists in a business, and how much it is worth, is a factual issue that needs to be decided on a case-by-case basis, usually with the help of an expert in business valuation. Generally, there are two types of goodwill. The first is professional or enterprise goodwill; this is goodwill in a practice not dependent on a particular professional’s presence or reputation. Enterprise goodwill can also be described as the tendency of patients, clients, or customers to return to a practice over and over and recommend its services to others, regardless of the presence of any professional in the practice. The second type of goodwill is personal goodwill, which is much more closely tied to the work of a certain individual.
How is Goodwill Valued in a Professional Practice?
Florida courts typically value the goodwill in a business or practice by determining the fair market value (FMV) of the business. This is the amount a willing buyer would pay for the practice, and that a willing seller would accept for it, with neither party being under duress. Taking the fair market value, less the value of the business’s tangible assets, yields an amount that can be attributed to goodwill in the business. The Florida Supreme Court has stated that it prefers this method and that it should be used exclusively for valuing goodwill in a professional association. Courts have said that it is not necessary to have sales of similar businesses or practices for comparison, so long as there is a reliable and reasonable basis for an expert to form an opinion regarding the fair market value of the practice in question.
The distinction between professional or enterprise goodwill and personal goodwill is important: Florida courts have said that while professional goodwill that exists in the business may be a marital asset, personal goodwill tied to the presence in the business of one of the spouses is not. For instance, in one Florida case, Akins v. Akins, 659 So. 2d 330 (Fla. 5th DCA 1995), in which the husband was a professional commercial artist, the court found that there was no reason to believe that the business had value irrespective of his individual reputation. In other cases, courts have said that goodwill did not need to be included in the fair market value of a business if that goodwill was contingent on a spouse continuing to be involved in that business. In other words, if goodwill cannot be separated from the presence of a spouse in the business or practice, it is not a marital asset.
In selling a professional practice, a professional might be asked to sign an agreement with the buyer indicating that the seller will not practice in such a way as to compete with the business being sold. The need for non-competition agreements such as this is evidence that there is little or no goodwill in the business itself, and that any goodwill is due to the reputation or personal relationships of the seller. Non-solicitation agreements and non-piracy agreements are treated the same as non-competition agreements under Florida law. Some spouses have tried (unsuccessfully) to argue that a non-solicitation or non-piracy clause in a sales contract means there was enterprise, rather than personal, goodwill in a business, and that the goodwill was therefore divisible.