Goodwill has never been considered a divisible marital asset in South Carolina—until now. Divorce courts throughout the country struggle with how to resolve goodwill issues in divorce cases and whether to include the value of enterprise or personal goodwill (or both) as part of the marital estate. The South Carolina Supreme Court recently jumped into the fray by resolving a novel question related to enterprise goodwill.
Online success: The flashpoint was a retail store that sold high-end light fixtures and home furnishings and accessories. The wife founded and built the business. The husband only got involved in the company in 2005, but he was a driving force behind the company’s decision to shift its focus to online marketing. At the time of divorce, the business made 80% of its sales through the Internet.
Three appraisers (two for the wife and one for the husband) agreed that most of the company’s value was in goodwill. The question was what to do with it. The wife’s first expert maintained that “at least” 20% to 25% of the total goodwill was personal to the wife and not subject to marital distribution. She was the one responsible for day-to-day operations, for ongoing product selection, and for monitoring and updating the website.
The wife’s second expert, a nationally recognized business valuator, said that website layout and product selection were critical if a company selling nonexclusive product on the Internet wanted to stand out because “the competition is fierce [and] the barriers to entry here are rather low.” The wife’s creative approach to the website’s layout and her eye for selecting desirable products were key to converting Internet users from visitors to clients. He called the other side’s claim that anyone could assume the wife’s position and could achieve the same good results a “field of dreams.”
The husband’s expert did not specifically determine personal goodwill but on cross-examination admitted there was “some” of it in the business. How much was “difficult to know,” but it might be between “5% and 10%.”
The trial court adopted the opinion of the husband’s expert in its entirety. It decided to attribute only 10% of the goodwill to the wife as personal goodwill. The remaining 90% of the company’s value, excluding the value of its fixed assets, was enterprise goodwill and included in the marital estate.
Novel question of law: Both sides appealed. The threshold issue was how to deal with the enterprise goodwill of the business, the state Supreme Court said. While South Carolina had a “categorical rule” against the inclusion of personal goodwill in the marital estate, this was the first time the high court was asked to consider “whether enterprise goodwill can be a marital asset subject to division.” The court answered “yes” but did so “cautiously, knowing that today’s decision does not and could not possibly answer the myriad questions that will arise.”
In the instant case, there was “undisputed” evidence that some of the goodwill in the business was personal to the wife. Testimony as to her role and involvement in the business supported her experts’ claims. There also were indications of enterprise goodwill, starting with the website’s domain name, which was associated with the business and not the wife.
The high court found the trial court erred in assigning merely 10% of the overall goodwill to the wife personally, and it adopted most of the valuation the wife’s first expert offered, including the proposed 20% for personal goodwill. At the same time, it ruled that 80% of the goodwill was enterprise goodwill, which was subject to marital distribution.
Takeaway: South Carolina adopted the majority approach, distinguishing between personal and enterprise goodwill. Enterprise goodwill, “which inheres in the business itself and is transferrable in the market,” is a marital asset, the Supreme Court says.
Find an extended discussion of Moore v. Moore, 2015 S.C. LEXIS 343 (Oct. 7, 2015), in the December issue of Business Valuation Update; the court’s opinion will appear soon at BVLaw.
Extra: Attend a webinar tomorrow (October 29) for a wrap-up of recent key valuation-related court cases. R. James Alerding (Alerding Consulting) and BVR’s legal editor Sylvia Golden will conduct BVLaw Case Update: A One-Hour Briefing.