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How Courts Classify Goodwill in Divorce

Bostick v. Bostick: Business Valuation and the Distinction Between Personal and Enterprise Goodwill

Understanding the distinction between personal and enterprise goodwill is crucial in divorce-related business valuations. The South Carolina Supreme Court’s ruling in Bostick v. Bostick (Opinion No. 28226, July 31, 2024) provides a valuable case study on how courts assess goodwill in the context of equitable distribution.

Case Background

The case involved a dentist (Husband) who owned and operated two dental practices in South Carolina. His wife (Wife) filed for divorce in 2017, and during the proceedings, Husband sold one of the practices (Ridgeland) to their son for $569,000, with an additional $51,113.15 in accounts receivable.

The contract divided the sale price as follows:

$144,860 for purchased assets
$424,140 for goodwill
A covenant not to compete was also included in the sale agreement

The trial court ruled that while the hard assets and accounts receivable were marital property, the goodwill component was personal goodwill and therefore not subject to division.

Court of Appeals Reversal

The South Carolina Court of Appeals disagreed, ruling that the entire sale price should be considered marital property. They remanded the case, arguing that the trial court failed to classify the goodwill component correctly.

Supreme Court Ruling

The South Carolina Supreme Court overturned the Court of Appeals’ decision, siding with the trial court. Their key findings:

Enterprise goodwill is independent of an individual’s reputation and remains with the business.
Personal goodwill is tied to an individual’s skills, reputation, and professional standing, making it non-marital property.
The burden of proof lies with the spouse claiming goodwill is enterprise goodwill.

The Court emphasized that Wife did not provide evidence proving that the goodwill of the dental practice was enterprise goodwill. Husband, on the other hand, successfully demonstrated that his personal efforts, reputation, and deep involvement in the community built the practice’s goodwill.

A significant factor in the Court’s decision was the inclusion of a covenant not to compete, which further supported that the goodwill was personal in nature.

Level Perspective

This case offers several important takeaways for business valuation professionals:

Personal vs. Enterprise Goodwill is fact-specific. Courts rely on the details of each case to distinguish between the two.
Covenants not to compete support the argument for personal goodwill. Market-driven transactions that require such agreements indicate that goodwill is tied to the owner.
The burden of proof is on the non-titled spouse to demonstrate that goodwill is enterprise goodwill and thus part of the marital estate.
Solo practices are often heavily tied to personal goodwill. Even when a business is sold, the owner’s reputation and skills are frequently the driving force behind its value.

Final Thoughts

The Bostick v. Bostick ruling underscores the importance of properly classifying goodwill in business valuation disputes. Courts will closely examine who or what drives the value of a business, and without compelling evidence, personal goodwill will likely remain separate from marital assets.

This article is based on analysis from Business Valuation Resources (BVR), the definitive source for valuation insights. Learn more at bvresources.com

Note: This article is for informational purposes only and is not to be used for commercial purposes.

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