A recent decision by Florida’s Fourth District Court of Appeal addresses whether the goodwill of a business constitutes a marital asset. See Schmidt v. Schmidt, No. 4D11-3379 (Fla. 4th DCA 2013). It is important to understand whether goodwill is a marital asset. If the court finds it is a marital asset, the court can include it in equitable distribution. In Schmidt, the trial court in a divorce proceeding valued the husband’s business at over $2.5 million. To reach this figure, the court accepted the testimony of the wife’s financial expert that the business was worth $3.5 million, minus approximately $1 million included in the valuation attributable to the goodwill of the husband. Id. at *2.
The Schmidt court began its analysis by discussing the types of goodwill which constitute a marital asset. Turning first to “enterprise goodwill,” under Florida law this form of goodwill represents “ the tendency of clients/patients to return to and recommend the practice irrespective of the reputation of the individual practitioners.” Id. at *1. This means that the entity itself, regardless of the individuals within it, has a degree of goodwill which draws customers to the business. Enterprise goodwill is a marital asset and therefore subject to equitable dissolution between spouses. Id., citing Thompson v. Thompson, 576 So. 2d 267, 269, (Fla. 1991).
Next the court looked at professional or personal goodwill. This form of goodwill is attributable to the skill, reputation and continued participation of an individual. Id citing Thompson at 270. Courts exclude personal goodwill from the value of a business for purposes of equitable distribution as it “represents nothing more than probable future earning capacity… Id. at *1, citing Taylor v. Taylor, 386 N.W. 2d 851, 858 (Neb 1986).
The appellate court in Schmidt reversed the trial court to the extent the judgment included personal goodwill in valuing the business. Id. at *2. The wife’s valuation expert testified that his $2.5 million value placed on the business assumed the husband would sign a non-compete agreement when the business was sold. Inclusion of a non-compete agreement when valuing the business, however, signals the existence of personal goodwill. Id. at *1. The appellate court reasoned that if the value placed on the business assumed a non-compete agreement, then the value included personal goodwill which is a nonmarital asset which should have been excluded from equitable distribution. Id., citing Walton v. Walton, 657 So.2d 1214 (Fla. 4th DCA 1995).