Business Goodwill and the Effect on Value
Stowe v. Stowe, ___ N.C. App. ___ (2020).
In North Carolina, Equitable Distribution (ED) is one of the mechanisms by which former spouses separate their personal and real property. What if the during the marriage one party opens a business? Unlike other forms of property, businesses have reputations that are carefully cultivated, as well as patrons and other intangibles that make the business more valuable than what can be accounted for on paper. Courts call this factor Goodwill. In the case below, we explore how one court handled Goodwill for an insurance company.
- Facts: Plaintiff wife and Defendant husband separated in September of 2017. While they were married, the parties decided to open and operate an insurance agency (Madison), registered in North Carolina as a Sub-S Corporation. Madison was an independent insurance agency that sold policies from over 30 vendors, with roughly 30% of the business selling Allstate. Madison became subject to ED in 2018 and, as part of the evidence, Plaintiff’s expert witness in valuation had assigned to Madison a value of $532,985.00 in Goodwill. Defendant’s expert’s valuation was not used. Among many other issues, Defendant appealed the Goodwill value supplied by Plaintiff.
- Issue: Was the trial court in error in using Plaintiff’s expert’s valuation of Goodwill?
- Rationale: In North Carolina, several factors provide the Courts guidance in valuing a business. Among them include fixed assets such as cash and equipment, assets such as accounts, liabilities, and intangibles such as Goodwill. Goodwill is typically defined as the reputation and patronage imputed to the business. Put in simpler terms, it is what customers believe about your business and why they continue doing business with you over your competitors. In an attempt to distill what makes up Goodwill, courts have relied on: the age, health, and professional reputation of the business owner; the nature of the business; the length of time the business has been in existence; its past profits; its comparative professional success; and the value of its other assets. This is where the trial court failed in their analysis of the Goodwill valuation. Instead of evidence relating to those factors, Plaintiff relied heavily on an Allstate internal summary book that gave some projections of commissions for agencies selling Allstate. She gave no evidence of how Madison compared to other agencies similarly situated.
- Lessons and Observations:
- Goodwill can be hard to define, but generally it tries to measure why your particular business stands out from the competition. That measurement has a value, one that can theoretically be obtained because there are past metrics that you can compare against the field. Reading between the lines, that measurement is based in a confidence that what makes your business unique will continue and drive more success.
- There should have been evidence for each of those factors. An internal summary book (one that is barely applicable since Allstate made up only 30% of the business, and it was for agencies that sell only Allstate) and past tax returns could not compute into an acceptable value for Goodwill. Nowhere in the evidence was there any comparison to competitors or consideration of the reputation of the Defendant. Even the smallest business has Goodwill and, as part of a holistic and accurate valuation, courts need to account for it.