As Florida residents evaluate their businesses as part of their divorce proceeding, they must understand the difference between enterprise and personal goodwill. Understanding the distinction between the two could significantly impact the final financial outcome of the divorce.
In terms of property division, several states consider enterprise goodwill as part of the marital estate. Excluding personal goodwill from the marital estate is based on considering it as potential earnings associated with an individual’s personal attributes.
Generally accepted accounting principles (GAAP) define goodwill as an asset representing future economic benefits derived from other assets acquired in a business combination, which are not individually identified and separately recognized. Goodwill involves intangible assets encompassing franchise reputation, business name, location, products or other comparable factors.
Personal versus enterprise goodwill
Personal goodwill–also called celebrity, individual or professional goodwill–is directly associated with an individual rather than an entity. In contrast, enterprise goodwill is connected to the entity or subject, representing the portion of goodwill associated with the organization rather than the individual.
Personal goodwill encompasses factors such as personal relationships with employees, suppliers, competitors or customers. For instance, if an attorney leaves a law firm and the clients choose to follow them regardless of the service quality available at the firm, it exemplifies personal goodwill.
Reputation is another aspect of personal goodwill, where a company’s reputation relies heavily on a single individual’s reputation. Warren Buffett’s reputation, for instance, significantly contributes to the value of Berkshire Hathaway.
Considering personal goodwill as nontransferable stems from its close association with the individual. In the context of divorce proceedings, goodwill with the potential for transferability is regarded as enterprise goodwill and gets treated accordingly.