In Florida, when a married couple’s business is being divided in a divorce, the court has to figure out how much of the business’s value is considered marital property. They don’t count the value of the business that comes from one spouse’s reputation or skills, because that’s called “personal goodwill” and it’s not included in the division of property. Instead, they only count the value that comes from things like the business’s location, employees, and brand name. This is to make sure both spouses get a fair share of the business’s value in the divorce. In Florida, when a married couple gets divorced, the way businesses are valued can be unfair. Experts can’t use a certain method to value a business, which can lead to one person getting a lot of money from the business while the other person gets very little. This happens because of the way Florida laws are written, and it can result in one person getting a big advantage in the divorce. In 1991, the Florida Supreme Court ruled on a case involving the value of a law firm. The court said that the goodwill of a professional association should be included in a divorce settlement if it was developed during the marriage. Goodwill in this context means the value of the practice that is more than its physical assets, and it includes the tendency of clients to return to and recommend the practice. The court said that the fair market value method is the best way to determine the existence of goodwill. Another case in 1992 disagreed with the first ruling, saying that goodwill dependent on a person’s reputation is not a marital asset. The court said that it’s difficult to separate goodwill from reputation in a professional setting and that the best way to show goodwill is through evidence of other professionals buying or offering to buy a similar practice. The court also said that it’s important to rely on competent, credible testimony to show the existence of goodwill. Before 1994, Florida courts mostly used market data and expert testimony to value businesses in divorce cases. But in Weinstock v. Weinstock, the court limited the use of market data for valuing a dental practice. The wife’s expert used sales data to value the practice and included goodwill in the value, while the husband’s expert used a different method and said goodwill couldn’t be proven separate from the owner’s reputation. The court said post-sale actions by the seller couldn’t be used to determine the business’s value. This decision caused issues because most real sales involve noncompete agreements. One judge disagreed, saying post-sale actions are just a way to transfer goodwill. This case showed the problems in Florida law for experts valuing businesses in divorces. The Fourth DCA reversed a decision saying that a business had no “institutional goodwill” and that it wouldn’t be worth anything without a non-compete clause. This makes it hard for Florida judges and practitioners, who rely on experts. It also makes it difficult to prove the value of a business, since buyers usually want a noncompete agreement even if it’s not related to personal goodwill. Other court cases have criticized this way of valuing businesses too. The Fourth District Court of Appeals made a ruling about how to value a husband’s insurance business in a divorce case. The court said that a nonpiracy/nonsolicitation agreement is not different from a covenant not to compete when valuing the business’s goodwill. This decision was tested in another case in 2013, and the court confirmed that a noncompete agreement still includes a personal goodwill component. The value of personal or professional goodwill must be excluded when assigning a value to a business for divorce purposes in Florida. This means that any reputation or skill of the business owner cannot be included in the value. Instead, the market value approach should be used, which considers what a willing buyer would pay and a willing seller would accept for the business. This approach does not take into account the personal reputation of the owner. Business valuation experts generally do not use fair market value as a method of valuation; instead, they use the income approach, the market approach, and the asset approach. In the case of Weinstock v. Weinstock, the court had to decide how to value the husband’s dental practice for divorce proceedings. The experts hired by the husband and the wife didn’t use the right methods to determine the value of the practice, so their opinions were rejected by the court. The court also said that the comparables used by the wife’s expert couldn’t be used as evidence because they didn’t consider the continued presence of the dentists after the sales took place. In the end, the court decided that the value of the dental practice was $440,000, with the goodwill valued at $300,000. In a court case, Judge Winifred Sharpe disagreed with the ruling because she believed that the professional services provided by a person selling their business should be considered as part of the business’s value, even if they only stick around for a short time after the sale. Abigail Beebe, a family law attorney, and Joshua B. Angell, a financial expert, are important figures in this field. The Florida Bar wants its members to understand the importance of doing their job well and helping the public. They also want to make sure that the justice system works better and to learn more about the law.
Source: https://www.floridabar.org/the-florida-bar-journal/goodwill-hunting-for-equity-the-florida-supreme-courts-unintended-result-of-the-thompson-case-part-i/
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