January 26 , 2018
Georgia is an equitable distribution state as far as determining marital property. Georgia family law judges in ourexperience have broad discretion in achieving an equitable distribution of marital assets among the soon-to-be-divorced couple. Attorneys and litigants hire business valuation experts to value marital assets subject to division. experience have broad discretion in achieving an equitable distribution of marital assets among the soon-to-be-divorced couple. Attorneys and litigants hire business valuation experts to value marital assets subject to division.
In a Georgia Supreme Court ruling in Miller v. Miller, 288 Ga. 274 (2010), the GaSC ruled that personal goodwill is separate property not to be included in the marital estate subject. In contrast, enterprise goodwill is a valuable part of a business enterprise and in most cases should be included in the value of the marital estate. Business owners could now argue that their business interest is separate property since the cash flow generated by their enterprise is related solely to their personal efforts which cannot be replaced or exchanged – if they stop work, their business cash flow ceases.
Personal and enterprise goodwill are intangible assets, as compared to tangible assets such as cash, real estate, or equipment. Personal goodwill can be quantified as a cost against the unadjusted value of an enterprise, often in the form of a percentage reduction in value. It is important to realize that most businesses have many types of intangible assets other than goodwill. Goodwill is NOT simply the difference between enterprise value and tangible assets.
Shannon Pratt, a leading expert of business appraisal theory and application, discusses the valuation discounts in Business Valuation Discounts and Premiums. Valuation discounts are costs which reduce the unadjusted Fair Market Value of a business enterprise based on variabilities of control, markets, and other special features. One such feature is the Key Person Discount, which may exist when an enterprise is “highly dependent on a single key person”. Thus, Personal goodwill is the equivalent of the cost a Key Person Discount and can apply to some extent in any enterprise. It is not unique to the classic professional trades like attorneys, doctors, etc..
Although Pratt points out that a Keyman Discount should be a quantifiable cost, it is often applied as a general percentage of the overall enterprise value, or as a percentage adjustment to the cost of capital. Business appraisers should be able to quantify the dollar impact on net cash flow attributable to an owner, including a professional owner. There are techniques for developing percentage costs which beyond the scope of this article.
For more on this call Brad at 770-380-2406. We will be following up this article with more discussion on this topic.