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Community Property • Businesses
CPROP#026
Legal Definition
The goodwill of a professional practice, the extent acquired during the marriage, is community property subject to division upon divorce. The measure of goodwill is calculated as the difference between a business' total value and the value of its assembled physical assets. The value is typically established by an expert witness at trial, and where a business sets a cap on goodwill, a court will consider it but will not be bound by it.
Plain English Explanation
Let’s talk about what happens when Bob owns a business, and he and Amy get divorced. Now, Bob’s business isn’t just about the physical stuff it owns—like the office, furniture, or computers. It’s also about its reputation, how loyal its customers are, and other things that don’t have a clear physical form. We call this extra value “goodwill.”
Goodwill is like the business's special sauce that makes it more valuable than just the sum of its parts. If Bob built up this goodwill during his marriage to Amy, the law says that this goodwill is community property. That means if they get divorced, Amy is entitled to a share of that goodwill.
But how do you figure out how much this goodwill is worth? It’s not like you can just pick it up and weigh it. So, what happens is, you take the total value of the business (including everything it owns, like money in the bank and customer contracts) and subtract the value of its physical assets. What’s left over is the goodwill.
Usually, an expert will come in during the divorce to help the court figure out the value of this goodwill. Now, Bob’s business might have already set a value on its goodwill for its own reasons, but the court isn’t forced to go by that number. The court considers it, but they make their own decision based on all the evidence.
Goodwill is like the business's special sauce that makes it more valuable than just the sum of its parts. If Bob built up this goodwill during his marriage to Amy, the law says that this goodwill is community property. That means if they get divorced, Amy is entitled to a share of that goodwill.
But how do you figure out how much this goodwill is worth? It’s not like you can just pick it up and weigh it. So, what happens is, you take the total value of the business (including everything it owns, like money in the bank and customer contracts) and subtract the value of its physical assets. What’s left over is the goodwill.
Usually, an expert will come in during the divorce to help the court figure out the value of this goodwill. Now, Bob’s business might have already set a value on its goodwill for its own reasons, but the court isn’t forced to go by that number. The court considers it, but they make their own decision based on all the evidence.
Hypothetical
Hypo 1: Bob and Amy own a successful graphic design firm together, which they started after getting married. The firm is well-known for its innovative designs and has a loyal client base. They decide to divorce. Result: In the divorce, the goodwill of the graphic design firm, which includes its reputation and client loyalty, is considered community property. The value of this goodwill, separate from the physical assets of the firm, is calculated and divided between Bob and Amy.
Hypo 2: During their marriage, Bob establishes a dental practice. The practice becomes popular, gaining many patients due to Bob's reputation as a skilled dentist. When Bob and Amy divorce, the practice's goodwill is valued. Result: The goodwill of Bob's dental practice, including his professional reputation and patient loyalty, is considered community property. An expert assesses its value, which is then divided between Bob and Amy in the divorce settlement.
Hypo 2: During their marriage, Bob establishes a dental practice. The practice becomes popular, gaining many patients due to Bob's reputation as a skilled dentist. When Bob and Amy divorce, the practice's goodwill is valued. Result: The goodwill of Bob's dental practice, including his professional reputation and patient loyalty, is considered community property. An expert assesses its value, which is then divided between Bob and Amy in the divorce settlement.
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