Under New Jersey divorce law, all assets “acquired by the parties or either of them during the marriage” are subject to equitable distribution at time of divorce. While most assets can be valued in a straightforward manner, a more elusive asset consists of a spouse’s interest in a business, especially with respect to the “goodwill” component. This is particularly significant in personal service businesses where the interrelationships between owners and customers is highest.
Simply stated, “goodwill” is the component of value above and beyond the tangible assets of the business attributable to the efforts and reputation of the owner. In many cases it is the premise upon which the business derives and maintains its customer base.
There are various methods for determining the existence and value of goodwill. One method is the so-called “excess earnings” approach which involves calculating the amount of the owner’s earnings above and beyond that which would generally be earned by other persons in the same business having an equivalent level of expertise and experience. Such “excess earnings” are then capitalized and added to the other assets of the business to arrive at a total value.
Needless to say, reasonable experts can and sometimes do disagree as to such matters. In addition, there are situations where goodwill exists but is not attributable to the owner, such as franchises where revenues are driven by the brand name rather than the name or reputation of the owner.
The important thing is that whenever a person going through a divorce is married to a business owner, his or her lawyer cannot overlook the potential existence of goodwill in terms of valuing the business for purposes of equitable distribution.