What is the proper measure of the value of a business solely in wife’s name in a Virginia divorce case?
In Newman v. Newman, CL08-342, a Virginia circuit court judge held that a business solely in wife’s name should be classified primarily as her separate property with a majority of its value being personal goodwill and a minority of its value being marital property in the form of commercial goodwill. The challenge for Virginia divorce courts in business valuation cases was well stated by the Virginia Court of Appeals in the case of Bosserman v. Bosserman, “[t]rial courts valuing marital property for the purpose of making a monetary award must determine from the evidence that value which represents the property’s intrinsic worth to the parties upon dissolution of the marriage.” Bosserman v. Bosserman, 384 S.E.2d 104 (Va. Ct. Appeals, 1989). No particular valuation method is required in Virginia, but the valuation method should be appropriate to the type of business, and based on the best information available to one’s expert witness, or as the Newman case teaches us, at least better information than is available to the other spouse’s expert witness.
In Newman, the Court entered the final decree of divorce for the parties in January 2010. Prior to the hearing for equal distribution, the parties had disagreed about the value of a closely held corporation, an LLC that was opened during the course of the marriage and titled solely in the wife’s name. The business was begun to facilitate the wife’s occupation, but the parties differed about the value of the business and how it should be divided. Both parties had the business valued, and each side presented its figure. The husband’s expert argued that the totality of the business was commercial goodwill, and, thus, subject to equitable distribution as marital property. The wife’s expert, however, placed the value lower and attributed a substantial portion of its value to personal goodwill, with the book value being a much lower figure.
Goodwill is the value of a business beyond its physical assets. In terms of equitable distribution, personal goodwill, also known as professional goodwill or individual goodwill, is traced to an individual and qualifies as separate property in a divorce proceeding. Commercial goodwill, also known as practice goodwill or business goodwill, can be traced to a business entity and is regarded as marital property. See Howell v. Howell, 31 Va. App. 332, 344 (2000). Goodwill would normally be proven in a divorce case through the use of expert witnesses, business valuation experts, or forensic accountants who can examine the appropriate information sources and develop a supportable opinion of value. Each party might hire his or her own expert witness to come up with a value, based on the information that party could obtain through personal records, public records, the discovery process to obtain financial records such as the corporate books and records, income statements, balance sheets, financial disclosures, loan applications, tax returns, personal property returns, business license applications, and other means. The Newman case became just such a battle of the expert witnesses, and the proper foundation for their opinion of value became the deciding factor. Under the husband’s theory, because his expert valued the entire business as commercial goodwill, the entire value of the business should be divided equally. Husband’s expert witness was not able to meet with the business owner wife, and relied on husband’s financial records and a website for the company that did not reveal much. Wife’s expert witness had the opportunity to meet with wife on several occasions, and examined financial records of the corporation prepared by a CPA. Consequently, the court accepted wife’s expert’s opinion and attributed the majority of value to personal goodwill rather than commercial goodwill. As such, the majority of the value of wife’s closely held corporation was her separate property, not marital property subject to equitable distribution.
You should consult with your Virginia divorce lawyer, or Richmond divorce lawyer James Wilson, to discuss the sources of information and expert witnesses you may need to determine the value of a business in a Virginia divorce case.