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“Goodwill Hunting” for Equity: The Florida Supreme Court’s Unintended Result of the Thompson Case, Part I

Family Law

What happens in a dissolution of marriage when a Florida court is tasked to value and distribute a business entity? The business entity constitutes a marital asset and is subject to F.S. §61.075. In Florida, when one spouse is the owner of a business and the court is asked to determine whether and to what extent there is a marital component, the parties, lawyers, and the court must deal with the existence of “personal goodwill” in determining the value of that entity for equitable distribution.

Personal goodwill in Florida is discounted and typically excluded from the marital estate.[1] “Personal goodwill” generally has been defined as any value that attaches to the entity solely as a result of one’s reputation or skill, representing nothing more than probable future earning capacity, and is not proper in the consideration of dividing marital property.[2] It is personal goodwill that Florida courts hold is “not proper in the consideration of dividing martial property,” rather, it is deemed an intangible asset arising from the unique skills, efforts, personality, and reputation of the individual.[3]
Personal goodwill is the opposite of enterprise goodwill[4] and is excluded from the marital estate because of an assumption that such an asset containing the goodwill component is not saleable, unlike other corporate assets that exist separate and apart from the skill set of the individual. “Enterprise goodwill” is deemed an intangible asset that arises from unique advantages of the business, such as its location, employees, strategy, and brand name recognition.[5]
For many years, Florida courts have equated personal goodwill to a covenant not to compete (or a transitionary services agreement), finding the goodwill value of a business arises because the owner spouse signs a noncompete agreement or a requirement that they remain in the business post-sale.[6] In a Florida court, value is predicated on the assumption of a noncompete or transitory consulting agreement as reflective of “personal goodwill.” This causes valuation experts, when tasked to value a business, to assume that a covenant not to compete will not be part of the transaction for purposes of valuation for equitable distribution.

Florida cases have created significant challenges for valuation experts causing inequitable outcomes for the parties involved in a dissolution of marriage.[7] Throughout Florida, even the most significant, real-world transactions of a closely held business require covenants not to compete, thus, leaving experts unable to utilize the market-value approach to support the finding of personal goodwill, even when personal goodwill is nonexistent in the sale.[8] Valuation experts are precluded from using any valuation method that is predicated upon the assumption of a covenant not to compete, as Florida caselaw says, which automatically indicates some component of personal goodwill.[9]

The resulting issue is experts using the “net asset value” approach in conducting their business valuations because there is no other “reliable” method to support a goodwill value, which does not include a covenant not to compete. This is the case even when intangible value exists completely separate from the individual’s reputation, ultimately resulting in economic inequities for the nonowner spouse, particularly when alimony is not a major factor or any factor at all. In Florida dissolution of marriages, it is professionals, including attorneys, who often use this exact reality to develop and present highly favorable monetary outcomes for the property owner spouse, leaving the nonowner spouse with very little economic potential from that marital asset. The result is an unequal distribution, a windfall, to one spouse in the distribution of “marital assets.”

The purpose of this article is an overview of the caselaw as it relates to personal goodwill in a Florida marital dissolution to discuss the challenges faced by experts directly caused by the caselaw as it stands today. This article demonstrates that by equating personal goodwill to a covenant not to compete, economic injustices are likely to occur. When a Florida court is trying to value a business entity at close to tangible net asset value, awarding one party the asset, which likely is substantially greater than net book value, and giving the other only the net book value of that asset in equitable distribution, the retaining spouse is often left with a windfall. This could manifest immediately if one spouse capitalizes on the true fair market value of that business post-divorce. This may be as simple as an immediate sale of that business with a “covenant not to compete.” Clearly, part of this injustice is a function of the amount of goodwill that can be realized by the owner spouse with a covenant not to compete.

The Law on Personal Goodwill in Florida

In 1991, the seminal case dealing with “goodwill” is the Florida Supreme Court case of Thompson v. Thompson, 576 So. 2d 267 (Fla. 1991). The case involved the valuation of a personal injury and medical malpractice law firm.[10] The central issue was whether the goodwill of the professional association should be factored in determining the association’s value for purposes of equitable distribution.[11] Applying the principles of equity and many other states’ various approaches, the Florida Supreme Court recognized that professional goodwill, if developed during the marriage, should be included in the marital estate.[12] However, the court held firm that for such goodwill to be a marital asset, it “must exist separately from the reputation or continued presence of the marital litigant.”[13] This further clarified that “if goodwill depends on the continued presence of a particular individual, such goodwill, by definition, is not a marketable asset distinct from that individual,” and represents nothing more than a “probable future earning capacity,” which, although “relevant in determining alimony,” is not relevant in determining equitable distribution in a marital dissolution proceeding.[14]

The Florida Supreme Court in Thompson defined goodwill within a professional setting to mean “the value of the practice which exceeds its tangible assets and which is the tendency of clients/patients to return to and recommend the practice, irrespective of the reputation of the practitioner.”[15] The court went on to hold that the fair market value method is the clearest way to find any existence of goodwill.[16] The court held the fair market value method is the exclusive way to measure goodwill of a professional association.[17] Fair market value is based upon “what would a willing buyer pay, and what would a willing seller accept, neither acting under duress for a sale of the business.”[18] It was explained that actual comparable sales data are not required when a reliable and reasonable basis exists for the expert to form their opinion.[19] Thompson emphasized that a determination of existence and value of goodwill is a question of fact and should be determined on a “case by case basis.”[20]

One year after Thompson, Young v. Young, 600 So. 2d 1140 (Fla. 5th DCA 1992), was decided in 1992 by the Fifth DCA. The court found that goodwill dependent on one’s reputation is not a marital asset.[21] The husband’s expert used the excess earnings method to show the goodwill value of the business.[22] The wife’s expert used a rule of thumb to develop a goodwill value at a much higher number.[23] As stated previously in Thompson, the husband’s expert indicated he had no way to determine what amount of goodwill was attributable to personal reputation, explaining most of the intangible value likely related to the husband’s personal reputation.[24] The trial court disagreed, finding neither experts method conformed with the fair market value approach as mandated by the Florida Supreme Court in Thompson.[25] Here, the court essentially split the difference, compromising between both experts’ respective values.[26]

The Fifth DCA reversed, holding that Thompson was misapplied.[27] Further, the Fifth DCA stated that Thompson merely laid the foundation that goodwill may be an asset subject to equitable distribution if there is evidence to support its existence, apart from the reputation of the practicing party….”[28] The court began by explaining how to determine if there is goodwill; the first step is to find goodwill existing separate from the reputation, then that amount, if any, must be quantified.[29] Here, the court found no reliable expert testimony to support the existence of goodwill, let alone the value attributable to such goodwill, stating “there was a complete absence of evidence of the existence of goodwill separate from reputation and tangible assets, therefore reversal of the [judge’s finding]” is required.[30]

The court first discussed how difficult it is to quantify goodwill in a professional setting,[31] noting that the “reputation of [the] individual and the goodwill of [the] enterprise are often inextricably interwoven.”[32] The court basically found the only way of actually showing goodwill is “evidence that other professionals are willing to pay for goodwill when acquiring a practice.”[33] Examples given of proofs of three types of evidence that may show the existence of goodwill: 1) evidence of a recent actual sale of a similarly situated professional practice;[34] 2) an offer to purchase such a practice;[35] or 3) expert testimony and testimony of members of the subject profession as to the existence of goodwill.[36]

Also, in the Fifth DCA, two years later, the court implied that actual market data or sales evidence are preferred, emphasizing how important competent, credible would be the preferable type, the court emphasized the importance of relying upon competent, credible testimony to show an existence of goodwill.[37] There was no discussion on exactly what type of testimony would be considered credible, and the court found none existed in this case. The court affirmed the rejection of the excess earnings method, finding it not to conform to the fair market value approach, which was already found as the preferred and proper valuation method.[38] The reason is unknown; it may have been a result of the expert’s testimony that he was unable to separate goodwill from reputation, using the excess earnings method.

Until 1994, it appeared that Florida courts preferred market transaction data coupled with reliable expert testimony.[39] However, the use of such data was limited in the case of Weinstock v. Weinstock, 634 So. 2d 775 (Fla. 4th DCA 1994), which involved the valuation of a dental practice.[40] The wife’s expert relied on comparable sales transactions to establish the fair market value, developing a value of the business with three-fourths of such business’ reflected goodwill.[41] The evidence presented that, of these transactions, all involved the selling dentist staying on for a period of time after the sale, which the wife’s expert testified was quite common in such sales.[42]

The husband’s expert valued the business using the excess earnings method,[43] claiming part of the value attributable to the practice was goodwill, further claiming there was no way to prove that goodwill existed separate from the reputation of the owner/husband.[44] Even with testimony relating to the practice of the seller remaining on for a period of time, the court held that such post-sale conduct of the professional “cannot serve as competent evidence of value in light of the language in Thompson” because an expert cannot separate the valuation component of service, post-sale, from goodwill.[45]

In Weinstock, husband’s counsel asked whether any of the comparable data would have existed had the dentist “just quit.”[46] The court stated, “the purest form of a comparable in the sale of any business, would be a sale in which, on the day of closing, the seller simply picks up the sales proceeds and retires or moves out of the area, eliminating any further personal influence the seller could have on the business.”[47] The “just-quit” standard, as the court termed, allows business valuations to occur without consideration of further influence by the selling party, post-sale.

Even when all post-sale efforts of a seller are excluded, significant evidentiary issues remain because most real world sales require some form of a noncompete.[48] In Weinstock, there was one dissenting opinion, where it was claimed that post-sale services are not goodwill in and of themselves, but simply a “means of transferring the goodwill.”[49] This dissent may have considered the problem in Florida law, as is, creates issues for experts in this area and that other approaches should be considered to provide an equitable division of assets on a dissolution.

It was the Fourth DCA that reversed the findings of a lack of any “institutional goodwill,” and that, “no one would buy the practice without a non-compete clause.”[50] Certainly this is problematic for Florida practitioners and judges, who rely upon experts. Also, this creates significant evidentiary challenges, as buyers typically require some form of noncompete even when the contracts do not actually relate to personal goodwill at all.

The Walton court referenced the pre-Thompson case, Spillert v. Spillert, 564 So. 2d 1146 (Fla 1st DCA 1990), criticized the capitalization of future income method, solely based upon the assumption that a noncompete agreement would exist on any sale and that a seller would stay with the business for a period of time.[51] In the case of Williams v. Williams, 667 So. 2d 915 (Fla 2nd DCA 1996), the Second DCA reversed the trial courts finding of goodwill because the husband’s expert stated that the business would have no value without a covenant not to compete.

It was the Fourth DCA, in Held v. Held, 912 So. 2d 637 (Fla. 4th DCA 2005), where the court was asked whether the trial court correctly valued the goodwill of the husband’s insurance agency as a portion of the parties’ equitable distribution was decided. In this case, the parties stipulated to the net book value of the business.[52] The court’s determination of fair market value was based upon the assumption that in any sale of the business that the husband would not sign a covenant not to compete, but a nonpiracy/nonsolicitation agreement.[53] The Held court differentiated, “the nonsolicitation/nonpiracy agreement clause prevents the seller from soliciting only those clients which he has just sold, but enables him to continue in the same trade or business, even if across, the street.”[54] In the same opinion, the court went on to state that the “purchaser would not be benefiting from any personal goodwill of the [h]usband, as the [h]usband could be in direct competition, except for the [60]customers who were sold as part of [the business].”[55]

While the economic rationale of the trial judge was innovative, the Fourth DCA disagreed, holding, “for purposes of distinguishing enterprise goodwill from personal goodwill in a valuation of a business, there is no distinction between a nonsolicitation/nonpiracy agreement and a covenant not to compete.”[56] This decision had to be because “both limit a putative seller’s ability to do business with existing clients of the business,”[57] and, therefore, the trial court’s decision regarding the difference of such agreements conflicted with the law in Florida regarding goodwill.[58]

It was in 2013, in Schmidt v. Schmidt, 120 So. 3d 31, 33-34 (Fla. 4th DCA 2013), where these findings were tested again, when the wife’s expert relied upon the “capitalization of cash flow method” to determine the value of the husband’s retail optical shop. All valuations by the wife’s experts assumed a noncompete agreement.[59] The Fourth DCA found, “because the…value requires execution of a non-compete agreement, it is clear that such valuation still includes a personal goodwill component,” and remanded the case to the trial court for purposes of determining the value of personal goodwill.[60]

[1] Kearney v. Kearney, 129 So. 3d 381, 390 (Fla. 1st DCA 2014).

[2] Thompson v. Thompson, 576 So. 2d 267, 269 (Fla. 1991); see also Schmidt v. Schmidt, 120 So. 3d 31, 33 (Fla. 4th DCA 2013) (The value of personal or professional goodwill must be excluded when assigning a value to a business for purposes of equitable distribution. Author Joshua Angell’s firm served as forensic accountants/experts in this case.)

[3] Doug Twitchell, BVR’s Guide to Personal Goodwill v. Enterprise Goodwill (5th ed. 2009).

[4] Walton v. Walton, 657 So. 2d 1214, 1215 (Fla. 4th DCA 1995) (Author Joshua Angell’s firm served as forensic accountants/experts in this case.); Held v. Held, 912 So. 2d 637, 639 (Fla. 4th DCA 2005).

[5] Twitchell, BVR’s Guide to Personal Goodwill v. Enterprise Goodwill.

[6] Essentially relating directly to the reputation or skill of the owner.

[7] Thompson, 576 So. 2d at 267.

[8] Id. at 270 (The “market value approach” is best described as what would a willing buyer pay, and what would a willing seller accept, neither acting under duress for a sale of the business. Where the excess over assets would represent the goodwill.).

[9] Thompson, 576 So. 2d at 267; Schmidt, 120 So. 3d at 31; Walton, 657 So. 2d at 1214; Held, 912 So. 2d at 639.

[10] Thompson, 576 So. 2d at 267.

[11] Id.

[12] Id. at 270.

[13] Id.

[14] Id. at 270 (citing Taylor v. Taylor, 22 Neb. 721, 731, 386 N.W. 2d 851, 858 (1986)).

[15] Id. at 269 (citing Hanson v. Hanson, 738 S.W. 2d 429, 434 (Mo. 1987)).

[16] Id. at 270 (We note that “fair market value” is generally not regarded by business valuation experts to be a method of valuation. Methods of valuation include the income approach, the market approach, and the asset approach. Fair market value is generally considered to be a premise of valuing, governing the assumptions.).

[17] Id.

[18] Id.

[19] Id.

[20] Id.

[21] Young, 600 So. 2d at 1142.

[22] Id. at 1141 (The husband’s expert in Young found the excess earnings to be at $204,599, which is the difference between the fair market value and the economic net worth of the professional association.).

[23] Id. at 1142 (The wife’s expert analyzed the production [which he equated with gross billings] and simply took half the production of the previous year as a good “rule of thumb” for determining goodwill. He then added the value of the real assets to the value assigned to goodwill. He assumed that after being sold, the practice would continue to generate the same production figures setting the value of goodwill at not less than $400,000.).

[24] Id. at 1141.

[25] Thompson, 576 So. 2d at 270.

[26] Young, 600 So. 2d at 1142.

[27] Id.

[28] Id.

[29] Id. at 1140.

[30] Id. at 1142.

[31] Young, 600 So. 2d at 1142.

[32] Id. citing Hanson, 738 S.W. 2d at 435.

[33] Id.

[34] Id.

[35] Id.

[36] Id.

[37] Weinstock v. Weinstock, 634 So. 2d 775, 777 (Fla. 5th DCA 1994).

[38] See Weinstock, 634 So. 2d at 776 (citing Young, 600 So. 2d at 1142) (The court concluded that neither appraisal conformed to the formula found in Thompson, and rejecting both. The experts’ opinions were rejected because they failed to use the fair market value approach mandated by Thompson. The husband’s expert, testified that he first arrived at an “economic net worth” of the husband’s medical practice and then determined “excess earnings.” The “excess earnings” represented goodwill, but, by using such an approach, he could not determine what portion of the excess earnings should be allocated for personality, presence, and reputation. Maintaining since most of the value of goodwill was attributable to the husband’s personal demeanor and philosophy, any goodwill could not be supported if the husband was removed from the practice. The wife’s expert created a “nonsensical rule of thumb to arrive at an inflated figure” by simply equating goodwill to one-half of the prior year’s gross billings.).

[39] See Young, 600 So. 2d at 1140.

[40] Weinstock, 634 So. 2d at 775.

[41] Id. at 777 (Where the court valued the husband’s dental practice at a total value of $440,000, with the goodwill valued at $300,000.).

[42] Id. at 779-780.

[43] Id. at 780 (the excess earning method had been rejected by the Fifth District in Young, 600 So. 2d at 1140).

[44] Weinstock, 634 So. 2d at 778.

[45] The court held that these comparables cannot serve as competent evidence of value in view of the language in Thompson that, “such goodwill, to be a marital asset, must exist separate and apart from the reputation or continued presence of the marital litigant.” Thompson, 576 So. 2d at 270. The wife’s expert opinion also would not be competent evidence under Judge Goshorn’s reasoning in Young since there was no attempt to deal with the problem of the continued presence of the dentists after the comparable sales took place. Weinstock, 634 So. 2d at 777.

[46] Id. at 778.

[47] Id.

[48] Id. at 779-780.

[49] Dissent: Judge Winifred Sharpe, Fifth District Court of Appeal, the only dissenting judge in Weinstock, recognized the inherent problems created by the court’s ruling. Indeed, Judge Sharpe, citing the Washington Supreme Court in In Matter of Marriage of Fleege, 91 Wash 2d. 324, 588 P.2d 1136 (1979), argued that the “fact that a professional may stay on with a practice for a short-time to facilitate the transaction to a purchaser does not mean there is no goodwill subject to equitable distribution.” Such services are not goodwill, but simply “the means of transferring the goodwill. Weinstock, 634 So. 2d at 781.

[50] Walton, 657 So. 2d at 1216.

[51] Id. at 1215.

[52] Held, 912 So. 2d at 641 (at $2,918,655, the court valued the business at $10,500,000, based upon the wife’s expert’s opinion).

[53] Held, 912 So. 2d at 640-641 (The trial judge attempted to differentiate between a noncompete clause and a nonpiracy/nonsolicitation clause, reasoning that, unlike a covenant not to compete, which prohibits the seller from competing within the geographical market, a nonpiracy/nonsolicitation agreement only prohibited the husband from soliciting/competing against the 60 clients that would be sold to the purchaser.).

[54] Id. at 638.

[55] Id.

[56] Id. at 640.

[57] Id.

[58] Held, 912 So. 2d at 641 (which emphasized that, to be a marital asset, goodwill “must exist separate and apart from the reputation or continued presence of the marital litigant.” Thompson, 576 So. 2d at 270).

[59] Schmidt, 120 So. 3d at 34.

[60] Id. (One unique aspect of Schmidt, was that the Fourth District did not reverse the wife’s expert’s opinion, but merely remanded the opinion to the trial court to exclude the personal goodwill component.).


Photo of Abigail BeebeAbigail Beebe is board certified in marital and family law. She is the owner of The Law Office of Abigail Beebe, P.A., a West Palm Beach-based marital and family law firm.



Photo Joshua B. AngellJoshua B. Angell CFA, ASA, CPA/ABV is the senior managing director of the Valuation Advisory Services and Litigation Practice Group of Ellrich, Neal, Smith & Stohlman, P.A., a valuation, consultancy, tax, and accounting services firm in Palm Beach Gardens.

This column is submitted on behalf of the Family Law Section, Amy C. Hamlin, chair, and Trish Armstrong, editor.


Family Law