Virginia divorce law allows for the recognition of personal and professional goodwill in the context of valuing a business owned by one or both of you. But just what is goodwill? What are the differences between personal and professional goodwill? And why is this so important. Keep reading to learn more.
The difference between personal and professional goodwill
To understand the difference between personal and professional goodwill, you must first understand the general concept of goodwill. Put in its simplest term, this is any quality that makes the business marketable. Or, put another way, it is any trait that makes the business appealing to a potential buyer, or valuable to its owner. As such, it is hard to quantify and is usually assessed subjectively.
Personal goodwill is also called “reputational goodwill.” It is best defined as a quality or trait unique to an owner that benefits the business. Accordingly, it is legally classified as separate property. This means a Virginia court can’t divide or distribute its value between you and your former spouse.
Another distinguishing characteristic is that personal goodwill is predicated upon an owner’s ongoing involvement in and contributions to the business. Examples include:
- The owner’s reputation in the community
- The type and extent of business relationships created because of personal characteristics
- Individual knowledge (unique possession of information and/or unique ability to analyze information)
- An individual’s skill set
Professional goodwill is also known as commercial or business goodwill. This type of goodwill is generally defined as any characteristic attributed to the actual business that enhances its value. Accordingly, it is legally classified as marital property for the purposes of a Virginia divorce. In other words, a court can divide and distribute its value between you and your ex-husband or wife.
Unlike personal goodwill, professional goodwill is not predicated upon the involvement or reputation of an individual owner. Examples include:
- The type of services provided
- The extent of the customer base
The concepts and defining characteristics of personal versus professional goodwill can be very subjective. Voluminous amounts of money are spent in Virginia courts every day as attorneys and their experts work to convince judges of the soundness of their arguments. A judge’s decision in this regard can have a vast impact on the divorcing couple’s financial distribution.
Why is business goodwill so important?
As we have already noted, courts are allowed to distribute the value of any marital property between the divorcing parties in Virginia. Marital property – including the value of professional goodwill –is legally defined as any property acquired by either party during the marriage, regardless of how it is identified.
Technically, this isn’t all that relevant if you and your former spouse co-own and work in the family business together. In this case, the question of how the business will continue to evolve post-divorce is more important than its value. However, if only one of you owns the business, any value associated with it becomes more significant.
Keep in mind, however, that you are under no obligation to let the courts help you end your marriage. This means you don’t have to worry about how a judge will rule on the division of your marital property – including the value of any business/professional goodwill. In fact, if you have opted for mediated divorce or similar alternatives, you don’t even have to agree with this approach to the division of your property at all.
However, the more you know about these and similar legal issues, the better equipped you will be to negotiate a fair and effective divorce settlement.
To learn more about personal and professional goodwill, the valuation of businesses and the classification/distribution of property in a Virginia divorce, contact us today.