Maginnis v. Maginnis - Court addresses apportionment of goodwill in divorce
March 8, 2022
Goodwill is the value of a business in excess of its net assets. It’s generally derived from a business’s name, reputation, customer loyalty, location, products and other factors that attract customers. A question that often arises in divorce cases is: To what extent should goodwill be included in the marital estate? A recent decision from the Court of Appeals of Kentucky addresses this issue.
2 types of goodwill
Many businesses — especially smaller ones — have two types of goodwill. First, enterprise goodwill is associated with the business as an entity, apart from any specific owners. This type of goodwill can generally be sold to a third party. Second, personal goodwill is attributable to an individual owner’s reputation, skills, education and experience. It’s inextricably tied to the individual owners and generally isn’t transferrable.
In divorce cases involving a business owned by one or both spouses, the treatment of goodwill varies from state to state. The majority view is that enterprise goodwill is a marital asset subject to division, while personal goodwill is not. Some states treat all goodwill as a marital asset, while others exclude goodwill from the marital estate.
Case summary
In Maginnis, the appellate court remanded the determination of the value of the couple’s chimney sweeping business to the family court. The family court had, among other missteps, failed to address the apportionment of goodwill between personal and enterprise goodwill pursuant to the Kentucky Supreme Court’s decision in Gaskill.
At trial, the court refused to permit the husband’s valuation expert to testify, finding that he had failed to adequately disclose “the substance of the facts and opinions to which [the expert was] expected to testify and a summary of the grounds for each opinion.” In dividing the marital property, the court adopted a value of roughly $284,000 set forth by the wife’s expert and ordered the husband to pay the wife half of the company’s value.
However, the wife’s expert stated that 70% of the company’s value was attributable to the husband’s personal goodwill — and, therefore, not subject to division. The court ignored this analysis. It also awarded the wife $3,300 per month in maintenance “until she remarries, cohabits or dies.”
The appellate court upheld the family court’s exclusion of the husband’s expert. But it also ruled that the lower court erred in not addressing the treatment of goodwill. On remand, the appellate court instructed the family court to consider the wife’s expert’s conclusions regarding personal and enterprise goodwill and to either:
Accept them and apportion the company’s value accordingly, or
Reject them and provide a sufficient explanation for doing so.
In reaching this conclusion, the appellate court rejected the wife’s argument that Gaskill was inapplicable because it involved the valuation of a professional practice. The court found no explicit indication in Gaskill that it was intended to apply only to professional practices. Indeed, the Kentucky Supreme Court relied heavily on the Indiana Supreme Court’s decision in Yoon, which repeatedly referred to valuing “a business or practice.”
Double dipping
The husband argued on appeal that the family court erred in awarding maintenance to the wife. By treating the entire value of the business — including personal goodwill — as marital, the husband said, the court had essentially attached his future earnings, so that an award of maintenance amounted to double dipping.
Although the appellate court vacated the maintenance award as part of its remand order, it noted that the husband’s argument was “well taken” and advised the family court to keep these issues in mind when dividing the business and awarding maintenance.
Lesson learned
The proper treatment of goodwill in divorce varies based on case facts, state law and relevant legal precedent. It’s critical to work with a valuation professional to help determine what’s right for a particular business interest. In some situations, legal precedents from other states may provide helpful guidance.