Goodwill and Owner Dependence in Family Law Business Valuations

Two people can look at the same business and see different things. The owner sees the hours, the phone calls at night and the customers who would leave the day they did. The former partner sees the income, the growth and the lifestyle it paid for. Both are describing goodwill, and the question of how far that goodwill depends on the owner is, in many family law valuations, the question that decides the value.

What goodwill is

Goodwill is the value of a business above its identifiable net assets. It is the reason a business earns more than its plant, stock and cash alone would justify: customers come back, referrers refer, staff stay, contracts renew. A business with strong goodwill is worth more than the sum of the things on its balance sheet. A business with none is worth roughly those things and no more.

One asset, not two

It is common to hear that goodwill "splits" into personal goodwill, which belongs to the owner, and commercial or transferable goodwill, which belongs to the business. That is a loose way of speaking, and it is not how Australian law treats the asset. The High Court described goodwill as a single asset of the business in Federal Commissioner of Taxation v Murry (1998), and the Australian Taxation Office adopts that approach in Taxation Ruling TR 1999/16. There is one goodwill, attached to the business.

What a valuer does is different from splitting it. The valuer analyses the sources of the goodwill and considers how far each depends on the owner personally. That analysis is a tool for assessing what value would transfer to a purchaser. "Personal versus transferable goodwill" is a useful heading for that analysis, provided it is understood as a description of where the goodwill comes from and not as a division of the asset into parts.

The sources of goodwill

Goodwill has many possible sources, and businesses draw on them in different proportions. Location: a cafe on the right corner, a clinic near the hospital. Name and brand: customers who search for the business by name. Systems and processes: a business that runs the same way whoever is on shift. Staff: people who hold the relationships and know the work. Contracts: supply agreements, service contracts, franchise rights, leases. Licences and registrations: some attach to the business, others to a person. Referral relationships: who sends the work and why. And the reputation, skill and relationships of the owner.

The last source is the one that matters most in family law, because it is the one that does not transfer.

Testing dependence on the owner

The valuer asks practical questions. How many hours does the owner work, and doing what? Do customers deal with the owner directly or with the business? Would a referrer keep referring if the owner left? Are the licences, accreditations or provider numbers the business depends on held by the owner personally? What happens when the owner takes a holiday? Could the staff run the business for a month? Has anyone other than the owner ever won a major customer?

The answers show how much of the business would still be there for a purchaser. A trade business whose builders phone the owner, a consultancy sold on one person's name, a practice whose patients follow the practitioner: each may produce a good income and yet have little that a buyer would pay for beyond the assets. A business with systems, staff, a brand and contracts that customers deal with is a different thing, and its goodwill would largely survive a change of owner.

Why it matters so much in family law

In a sale the question resolves itself: a buyer pays what the business is worth to them, and if it depends on the vendor, the price and the terms reflect that. In a family law matter there is no buyer. The value is assessed as if there were, and the parties then deal with the figure.

That produces two common misunderstandings. The owner may argue that the business is worth nothing without them, and so should be given no value. The other party may argue that the business is worth the income it produces, and so should be given a high value. Usually neither is right. A business that depends heavily on the owner still has assets, and often some goodwill that would transfer. A business that produces a strong income is not worth that income if a purchaser could not earn it without the owner. The valuation sits between the two, and the report shows where and why.

It is also worth being clear about what the analysis does not do. A finding that most of the goodwill depends on the owner does not make the owner's income disappear from the matter. The value of the business and the income it produces are different things, and how each is treated in the settlement is a question for the lawyers.

The evidence a valuer looks for

Dependence on the owner is a finding, not an assertion, and it has to be supported. The valuer looks at the owner's role and hours, the staff structure and who else holds relationships, customer and referrer concentration, whether the licences and contracts are in the business's name, the history of the business when the owner was absent, and the terms on which key people are employed. Where the owner's own account of their importance is not borne out by the records, the report says so. Where it is, the report says that too.

Adjusting for the owner's own work

Related to goodwill, but distinct from it, is the adjustment for the owner's remuneration. Before goodwill is assessed, the earnings are normalised so that the owner is paid what it would cost to employ someone to do the same work. A business that only makes a profit because the owner works for less than a replacement would cost has less maintainable earnings than its accounts suggest. The report explains the rate adopted and why.

What the report should say

A good report does not simply announce that goodwill is personal or transferable. It identifies the sources of goodwill for this business, explains which depend on the owner and to what extent, sets out the evidence, and shows how that analysis fed into the method and the value. A reader who disagrees can then point to the specific finding they dispute, which is far more useful to both parties than a dispute about the figure.

Where to from here

If the business at the centre of your separation depends on one person, the analysis above is likely to be the heart of the valuation. A Settlement Valuation at $2,995 + GST addresses it for negotiation and mediation. Where an expert report for court is required, a Court Expert Valuation from $8,995 + GST does so on suitable instructions, with the final fee confirmed after scope review. Tell us about the business and we will confirm the appropriate scope. More on the businesses we value is on the What we value page.

This is general information about goodwill and owner dependence in business valuations. It is not legal, taxation or financial advice. The treatment of goodwill in a particular matter depends on the facts, the instructions and any applicable court orders.