A SOUTH CAROLINA OPERATING AGREEMENTS AND SHAREHOLDRER AGREEMENTS SHOULD SPECIFICALLY                                   ADDRESS GOODWILL

         After a 2015 South Carolina Supreme Court decision, all Operating Agreements, Shareholder Agreements, and Partnership Buy-Sell Agreements in South Carolina should address how the owners or parties to the Agreement want to handle the valuation of “enterprise goodwill” of the business. Prior to the recent decision of the South Carolina Supreme Court in Moore v. Moore[1], South Carolina courts held that general “goodwill” was too speculative to be used by courts in the calculation of business valuation. 

In the Moore v. Moore case, however, the South Carolina Supreme Court recognized for the first time a distinction between “enterprise goodwill” and “personal goodwill.” In the divorce case, the Court ruled that South Carolina courts could consider enterprise goodwill of the furniture company owned by the divorcing couple, but not personal goodwill, in the valuation of marital property subject to equitable division. Although the case occurred in the context of a divorce, the holding will have implications in business valuation cases, including departing members and shareholders of LLCs corporations.

Enterprise goodwill includes a business’ potential to earn future profits without consideration of the individuals managing the company. An example of a company with primarily enterprise goodwill is the furniture business discussed in the Moore v. Moore case, and an example of a company with primarily personal goodwill are the dentists businesses discussed in previous South Carolina cases. The former benefits primarily from a “brand,” and the latter benefits primarily from an individual.

After Moore v. Moore, if a business owner of an LLC or corporation is fired or quits, the owner may receive compensation for his or her share of the enterprise goodwill value included in the overall business valuation, if any. Of course, this depends on the language of the Operating Agreement (for a LLC), Shareholder Agreement (for a corporation), or a Buy-Sell Agreement (for a partnership). As a practical matter, this means that if the relevant agreement provides for compensation based on “market value” or a similar term, business valuation experts (i.e. “hired guns”) will provide competing valuations, which likely will differ greatly. This is what happened in the Moore v Moore case, with the husband’s and the wife’s valuation experts providing very different valuations of the respective enterprise goodwill and personal goodwill of the furniture business.

What this means for owners of closely-held businesses in South Carolina is that the owners need to discuss having an agreement that sets the terms for the value of a departing partner’s interest in the business.  A provision that simply provides for fair market value could very well lead to a dispute.  Moreover, in the absence of any provision in an agreement, the statutory default provision likely will require “fair value.”  See, S.C. Code §33-44-701. If a value for goodwill is intended to be excluded, after the Moore v. Moore decision, the agreement should expressly exclude it. Business owners need to discuss how to set a value for a departing owner’s share in a business.