A recent case from South Carolina shows that when selling a business during a divorce, it’s important to think about different aspects of the business figure into the sale price and how that might affect the division of the proceeds.
In that case, after the wife filed for divorce she reviewed and agreed to a contract for the sale of her husband’s dental practice. According to the contract, $424,140 of the $569,000 purchase price represented “goodwill” while the other $145,000 represented assets being sold.
The divorce went to trial over division of marital assets. At trial, the judge ruled that the $145,000 in hard assets were marital property and should be split between the husband and the wife. But the judge ruled that the goodwill component was a nonmarital asset because it constituted “personal goodwill” the husband had earned through his professional status.
The wife appealed the decision, arguing that the goodwill should actually be considered a marital asset to be divided as well.
The South Carolina Court of Appeals agreed. As the court noted, at least in South Carolina there are two types of goodwill — “enterprise goodwill,” which attaches to the business, independent of any particular individual, and “personal goodwill,” which attaches to a particular person based on his or her reputation. The court also noted that enterprise goodwill is a marital asset that gets split up in a divorce while personal goodwill belongs only to that individual and is not part of the marital estate.
Here, the court said, the practice was being sold and was not an ongoing concern. Because nothing in the sales contract required the husband to remain active in the dental practice, there was no evidence that any of the sales price was attributable to personal goodwill.
Other states may handle the issue differently, and it’s possible that in another state, the husband could have retained part of the sales proceeds as personal property if the contract itself had allocated part of the sale as “personal goodwill.” However, this case strongly suggests that for any of the proceeds to be considered personal goodwill, you would need to maintain some active role in the business after the sale.