Valuation of businesses in divorce: personal goodwill and enterprise goodwill

A business’s goodwill consists of its “reputation, patronage, and other intangible assets that are considered when appraising the business.” Black’s Law Dictionary 703 (7th ed. 1999). Under Maine law, enterprise goodwill is quantifiable property subject to equitable distribution by the court. Ahern v. Ahern, 2008 ME 1, ¶ 14, 938 A.2d 35. Personal goodwill, in contrast, “is associated with individuals. It is that part of increased earning capacity that results from the reputation, knowledge and skills of individual people.” Ahern v. Ahern, 2008 ME 1, ¶ 11. Personal goodwill is not divisible marital property.

In Ahern, competing experts attempted to value a dental practice. The Ahern court determined that the personal goodwill attributed to a named profession is not a species of property subject to equitable distribution. In general, under Maine law professional degrees and licenses are not subject to equitable distribution, but are relevant only to establish a professional’s earning capacity. See Sweeney v. Sweeney, 534 A.2d 1290, 1291 (Me. 1987).

Enterprise goodwill, according to the Ahern court, is “based on the intangible, but generally marketable, existence in a business of established relations with employees, customers, and suppliers” and may include many other factors. Ahern v. Ahern, 2008 ME 1, ¶ 11. The Law Court has found goodwill of an insurance agency divisible, Lord v. Lord, 454 A.2d 830 (Me. 1983), and that the goodwill of an investment business “could be quantified and realized from a sale of the business.” Hess v. Hess, 2007 ME 82, ¶ 18–19, 927 A.2d 391.

Since the Law Court has adopted the enterprise/personal goodwill framework, practitioners must educate their expert on the requirements of the law and develop methodologies to properly identify and value enterprise goodwill. It is not necessarily a take-it-or-leave-it proposition. Goodwill in a business does not necessarily mean all personal or all enterprise. Quite frequently, courts conclude that a percentage of the value of the business is personal goodwill recognized to the founder or other important developer, while the remainder of the business is enterprise goodwill subject to valuation and distribution.

This article is the fifth installment in a series providing general information about the use of expert testimony and opinion testimony in divorce litigation.  The entire Chapter regarding the Use of Experts in Divorce Litigation was published by MCLE New England in February 2016:  A Practical Guide to Divorce in Maine.  The Guide is available for purchase at the MCLE New England website.

Gene R. Libby

Gene R. Libby

Gene has a rich history of litigation experience over the last 30 years. He has tried over 100 civil and criminal jury cases to verdict. His practice focuses on a wide variety of civil and criminal litigation representing individuals and small businesses, including divorce, real estate disputes, small business litigation, elder law, personal injury, professional… Read more »