Valuating Your Business in a Divorce

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January 21, 2014
Tags: divorce

When assets are divided in a divorce, one of the trickiest and most cumbersome issues can be valuating a business. Keep in mind that in Oregon not every aspect of a business’s potential value is considered in dividing the assets. Perhaps the most significant area where this comes into play is the issue of “goodwill value.” Goodwill is an intangible business asset that covers things like name recognition, reputation, repeat business, customer relations, and so forth. Goodwill is further broken down into two categories: so-called “enterprise goodwill” (sometimes called “business goodwill”) and “personal goodwill.”

“Enterprise goodwill” is goodwill attributable to the business itself. For example, if the silent owner of a particular restaurant sold the business, people would continue to go that business because of the restaurant’s name and reputation in the local community. “Personal goodwill” is goodwill attributable to an individual’s skills, personality, and reputation. If that individual were to leave the business, he or she would take that goodwill with them. For example, if a popular doctor were to leave a particular office, it is likely they would take their reputation, and part of the entity’s business, with them.

In many states, divorce courts do not distinguish between types of goodwill and consider both in valuing a business. Not so in Oregon. Because of a case called Slater and Slater, here in Oregon enterprise goodwill is considered by the Court to be a divisible marital asset, but personal goodwill is not.

If you are valuating a business in Oregon, this is critical to keep in mind. Our office has come across a number of cases where the person valuating the business simply gives the value of the business considering everything and no one asks whether part of that value is attributable to personal goodwill. The problem isn’t necessarily that the valuator is wrong, it’s that the litigants don’t know what to ask for and sometimes the valuator doesn’t know what you need.

This valuation issue is fairly unique to divorce law, so if your valuator doesn’t regularly do valuations in the divorce context, he or she may not be aware of the Slater rule. Further, many valuators who do regularly practice in this area disagree with the Slater and Slater decision. Some won’t include the so called “Slater value” separately in their reports unless one of the parties specifically requests them to. Nonetheless, given the current state of the law on this issue in Oregon, it is critical that the litigants make such a request to ensure they are getting a valuation that specifically includes what part of the overall value is attributable to personal goodwill and thus not considered a divisible marital asset by the Court.