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write a summary of this article: Internally Generated Intangible Assets and the Value of Personal Goodwill GENE A. TREVINO, PhD O ne of the more
write a summary of this article:
Internally Generated Intangible Assets and the Value of Personal Goodwill GENE A. TREVINO, PhD O ne of the more contentious and elusive issues in divorce settlements involving a closely held business is the determination of personal goodwill. Personal goodwill is the por- tion of a business' value that can be attributable to the special skills, reputation, and personal relation- ships of the owner. In many states, such as Texas, personal goodwill is not divisible; hence, distin- guishing the portion of a business' value attrib- utable to personal goodwill is paramount to an equitable settlement of a community estate. The most common way to estimate the value of the business owner spouse's personal goodwill is to apply a percentage to the goodwill of a business. This personal goodwill percentage depends on how much value can be attributed to the business owner spouse's attributes rather than the attributes of the business entity. If the business heavily relies on the efforts of the business owner spouse, such as a professional practice, a copious portion of good- will is normally allocated to personal goodwill. The identification of internally generated intangible assets in a business can reduce the business owner spouse's personal goodwill. Internally generated intangible assets are often not considered by par- ties in a divorce settlement because they are not readily identifiable. The objective of this article is to help family law practitioners identify the exis- tence of internally generated intangible assets and understand their effect on the value of personal goodwill. GOODWILL DEFINED Goodwill is an intangible asset that can be defined as the transcendent portion of a busi- ness' value over the value of its identifiable assets. A common definition of goodwill is the residual value of all the synergies of a functioning busi- ness that cannot be specifically identified with any other intangible factor (Stice & Stice, 2012, p. G-8). Goodwill can be bifurcated into enterprise good- will and personal goodwill. Enterprise goodwill is defined as the value of earnings or cash flow directly attributable to attributes of a business that result in earnings from consumers returning to the business, earnings from consumers seeking out the business, and earnings from referrals made to the business (Wood, 2012, p.41). Attributes that emanate from the business entity can include such things as location, customer base, skilled or cour- teous personnel, and well maintained premises. Enterprise goodwill is a bundle of attributes that have been institutionalized as an integral part of a business entity. Personal goodwill is defined as the value of earn- ings or cash flow attributable to the attributes of the individual business owner that result in earnings from consumers returning to the business, earnings from consumers seeking out the business, and earn- ings from referrals made to the business (Wood, 2012, p.40). As one can discern, the distinguishing factor between enterprise goodwill and personal goodwill is whether the business entity's attributes or the owner's attributes are driving the earnings of a business. Attributes that emanate from the busi- ness owner can include such things as specialized skills, established relationships with key custom- ers, and professional reputation. In Lopez, the court Gene A. Trevino, Phd., is a forensic economist with Economic Evidence in San Antonio, Texas. His prac- tice focuses on the valuation of closely held firms and economic loss for civil litigation.
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