Many divorcing couples struggle to agree on the value of a professional practice, particularly its goodwill, which is its value beyond the market value of any tangible assets. Battling spouses argue vastly different calculations for this business asset that neither can see nor touch nor sell.
It is not an easy call. One Florida court likened “[t]he attempt to determine the goodwill value of the business of a sole professional practitioner, absent consideration of reputation, presence and tangible assets, is somewhat akin to a metaphysical quest for the sound of one hand clapping.”
Goodwill, which includes reputation, prestige, and company name, is the favor that a business enjoys by virtue of being established — that hard-to-calculate part of the whole that is greater than the sum of its parts. Goodwill is based on the observable phenomenon that when a business is sold, the sale price is greater than the value of its assets.
In divorce actions, particularly those involving professional practices such as a doctor or lawyer, goodwill becomes a point of contention when one side (usually the professional himself) contends that it is separate property and the other side (usually the wife) contends that it is marital. Very often goodwill can far exceed the value of any physical assets accumulated by the professional. Goodwill can also be a factor among tradesmen. Ralph runs a thriving shoe repair business out of a hole-in-the-wall shop on a side street, but when Ralph and Mrs. Ralph want to retire they cannot find a buyer because all the value of the business is Ralph and his reputation for good work.
In divorce actions, courts must grapple with the distinction between realizable goodwill, which can converted to cash by selling the business, and unrealizable goodwill, which is the business, professional and marketing skills of the owner. In general, most courts hold that realizable goodwill is marital property and take a variety of positions about unrealizable goodwill.
Or the craftsman, in the case of the shoe repair shop. In some businesses unrealizable goodwill may be the business. Ralph’s Shoe Repair has a substantial value as long as its founder, proprietor and sole employee does the work; without Ralph, its value is reduced to nothing but the sale value of his tools and tiny shop.
Goodwill questions also surface when courts must deal with the goodwill value of professional degrees acquired during the marriage, particularly when one spouse (often the wife) forsakes a career for the promise of a payoff of enhanced earnings because of the degree (taken by her husband).
A majority of American jurisdictions hold that personal goodwill of a business is unrealizable and cannot be classified as marital property; on the other hand, enterprise goodwill — “the corporate, transferrable reputation of the business itself” — is realizable and must be included in the marital estate. “If enterprise goodwill is not marital property, the valuation of a business will be much lower than the actual price than the same business could command on the open market.”