Clients always have questions on how this business interest or business ownership will be handled during a divorce. For purposes of equitable distribution of marital assets and debts, a value must be placed on each asset. A person with a “business interest” has a unique asset and one that may require a more complicated valuation process. However, there are some basics to business valuations that a divorce client should understand.
In determining the value of a business, there are two phrases that are commonly used. “Book value” means the value of the business assets minus the liabilities. “Adjusted book value” typically means that capital assets are listed at their appraised value instead of a depreciated acquisition value. Both of these terms are used frequently when determining the book value of a business for equitable distribution.
Additionally, courts look at the goodwill associated with the business. Generally, the “goodwill” of a business is a value that is placed on the business’ positive reputation. From a technical standpoint, business goodwill is calculated by the difference in the purchase price of the business and the book value discussed above. So, you may be thinking, what “makes” goodwill? A positive business goodwill depends on the combination of many factors, some of which include advantageous location and positive relationships with customers or other businesses.
Additionally, they need to look at personal goodwill in the process of dividing the business. Personal goodwill is goodwill that is entirely personal and that cannot be transferred to a third party. Whereas a business’ goodwill can be included for purposes of equitable distribution, personal goodwill is not considered when dividing marital assets during divorce. For example, the Pennsylvania case of Smith v. Smith, 881 A.2d 855 (Pa.Super.2005) held that even with a sole practitioner, business location and customer lists were NOT personal goodwill and could be assigned a business valuation for equitable distribution purposes.
If you are facing a Pennsylvania divorce in which a business is involved and want to learn more about the process of PA equitable distribution, contact our Western Pennsylvania attorneys at Lisa Marie Vari & Associates today to schedule a consultation.