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Business Valuation in Illinois Divorce Cases - Application of Personal Goodwill Discount

By:  Jeffrey Brend

Perhaps the most frequently asked questions in business valuation cases are what is "personal goodwill" and why is it not included in the value of a closely held business. The Illinois Supreme Court first addressed the issue of personal goodwill and "double dipping" in Marriage of Zells, 143 Ill.2d 251, 572 N.E.2d 944 (1991). The Illinois Supreme Court readdressed the issue of personal goodwill and addressed for the first time the issue of enterprise goodwill in Marriage of Talty, 166 Ill.2d 232, 652 N.E.2d 330 (1995). In Talty, the court stated "...we were not called upon in that case (Zells) to distinguish between personal goodwill and enterprise goodwill." In Talty, the court provided guidance on how to avoid "double dipping" (considering the fact that personal goodwill "is already reflected in a number of the circumstances that must be considered by a judge in making an equitable division of property under the [Dissolution] Act.") The court decided that no discount should be given for enterprise goodwill in the context of a divorce proceeding (See Talty); but a discount for personal goodwill is appropriate where applicable. It then set forth the method to determine how to calculate the enterprise goodwill value of a business in Illinois:

"To the extent goodwill inheres in the business, existing independently of William's personal efforts, and will outlast his involvement with the enterprise, it should be considered an asset of the business and hence of the marriage. In contrast, to the extent that goodwill of the business is personal to Williams, depends on his efforts, and will cease when his involvement with the dealership ends, it should not be considered property." Id. At 240.

As such, the value of an income-producing asset in a divorce is its value assuming the owner-spouse is no longer involved in the operations of the income-producing asset, thereby avoiding the "double dipping" issue. Implicit in this analysis is the existence of a covenant not to compete, a document that ensures no further involvement by the owner-spouse in the business. Compare the nature of the practice to an income-producing asset such as an apartment building generating rental income. The value of an apartment building is generally treated as 100% enterprise goodwill even though the rental income of the property is considered when valuing the asset as well as in setting support. This is because without any further involvement of the owner-spouse, the value of the asset will remain the same.

Several years after the Talty decision, in Marriage of Schneider, 214 Ill. 2d 152, 824 N.E.2d 177 (2005), the Illinois Supreme Court, clarified that personal goodwill cannot be considered a marital asset even if support is not at issue. As such the standards enunciated in Talty should be adhered to when dividing personal vs. enterprise goodwill.

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