Posted by Nydia Streets of Streets Law in Florida Divorce

How does a Florida divorce court determine the value of a business owned by the spouses? How about goodwill in the business? Goodwill refers to the value of the business attributable to the efforts and reputation of a spouse - that is, how much of the business’ value and revenue is due to a spouse’s interactions with customers or reputation in an industry? These were issues in the case King v. King, 1D19-3280 (Fla. 1st DCA March 4, 2021).

The parties were married for 14 years before a petition for dissolution of marriage was filed. Five years prior to the filing of the petition, the couple bought an insurance agency from the former husband’s parents. The former husband served as the CEO and was the company’s top revenue producer. The former wife served as the bookkeeper. When the agency was purchased, the couple assumed the agency’s debt which exceeded $1,000,000. Additional debt was incurred in the form of loans when the former husband negotiated a purchase of the books of business from other insurance agencies. At trial, each side presented experts to testify about the value of the business and the value of the former husband’s goodwill.

Ultimately, the trial court entered a final judgment which valued the business at over $3,000,000, attributing approximately 7% of the value of the business to the former husband’s goodwill and ordering the former husband to pay alimony of $12,000.00 per month to the former wife. The former husband appealed, arguing the court’s valuations were not supported by competent, substantial evidence, and that the court improperly calculated his income for purposes of determining alimony.

The appellate court first discussed the valuation of the business. The court held “When the trial court adopted only part of [the former husband’s expert’s] valuation of KIA—the valuation of the assets—the trial court excluded from its calculation any of KIA's liabilities. [The former husband’s expert’s] calculated KIA's liabilities (or corporate debt) to be $724,833. The trial court's exclusion of KIA's liabilities in its determination of KIA's fair market value led to a significant overvaluation of the company in the court's equitable distribution plan. This was error because no competent, substantial evidence in the record supports the trial court's valuation of KIA.”

Next, discussing the valuation of the former husband’s goodwill, the court noted “To determine the amount of a party's personal goodwill that should be excluded from the valuation of a business, 'the evidence should show recent actual sales of a similarly situated practice, or expert testimony as to the existence of goodwill in a similar practice in the relevant market.'‘“ (internal citation omitted). The court held “In reaching the 7.3% figure, Gray relied on data from the DealStats database. In some of the transactions, the database allowed the parties to the transaction to report the value of a covenant not to compete from selling an insurance company. Because the reporting parties valued most of the non-compete covenants at less than 10% of the business transaction, Gray took the average values from the transactions to come up with the 7.3% he assigned to Former Husband's personal goodwill in KIA. But Gray did not provide any specific knowledge about the particulars of the insurance businesses that reported transactions in the DealStats database. Gray did not disclose whether the owners of those businesses also sold insurance (as Former Husband did), how involved the owners of those businesses had been with the companies, or anything about the day-to-day operations of those businesses. And the record showed that many transactions Gray analyzed took place outside Florida, with some dating back almost twenty years. For these reasons, Gray's analysis of the selected DealStats transactions and the reported values of the related noncompete clauses do not provide competent evidence to support the trial court's determination of the amount of Former Husband's personal goodwill in KIA. This is particularly true where the record shows that Former Husband is the CEO of KIA, its largest producer of revenue, and remains involved in all aspects of the business.”

Finally, the court found the former wife had a need for alimony, but it determined the trial court did not accurately determine the former husband’s ability to pay because of an error in computing his income. The court held “KIA is an S corporation. Although S corporation income is taxed directly to a shareholder (here, the Former Husband), that does not mean that the shareholder will ‘receive distributions in an amount equivalent to what is taxed.’ [citation omitted] In fact, an S corporation may not make distributions to shareholders if the corporation would be unable to pay debts as they become due. [citation omitted]. In the context of an alimony determination, undistributed pass-through income that an S corporation has retained for corporate purposes does not constitute income to the shareholder spouse. Even so, the shareholder spouse has the burden to prove that the corporation's retention of undistributed pass-through income is for corporate purposes and not for the purpose of avoiding alimony, child support, or attorney's fees obligations by reducing the shareholder spouse's amount of available income. Former Husband met his burden to prove that much of KIA's pass-through income was retained for the corporate purpose of paying corporate debt or liabilities. From the pass-through income amounts, Former Husband made monthly payments of $3,841.83 and $3,862.16 in corporate debt owed by KIA to Westfield Bank."

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