Threshold Question: Is the goodwill of attributable to a business opened during the marriage a quantifiable and divisible marital asset upon divorce?
What is Goodwill?
On the broadest level, “goodwill” is the expectation of continued public patronage. See Business and Professions Code § 14100. One court has described goodwill as “the advantage or benefit which is acquired by an establishment beyond the mere value of the capital stock, funds or property therein, in the consequences of public patronage and encouragement it receives from constant or habitual customers, on account of its local position, or common celebrity, or reputation for skill or affluence, or punctuality, or from other accidental circumstances, or necessity, or even from ancient partialities or prejudices.” See Marriage of Lyons (1938) 27 Cal. App. 2d 293, 297-298.
Is Goodwill an Asset Which Can be Valued and Divided in a California Divorce?
Yes. Incident to the valuation of a business, the court must determine whether goodwill exists. If goodwill exists, the goodwill must be assigned a value and factored into community property division. See Marriage of Greaux & Mermin (2014) 223 Cal. App. 4th 1242, 1251; see also Marriage of Watts (1985) 171 Cal. App. 3d 366, 370-372.
How is Goodwill Valued in a Divorce?
There is no “rigid and unvarying rules for the determination of the value of goodwill, but have indicated that each case must be determined on its own facts and circumstances.” See Marriage of Foster (1974) 42 Cal. App. 3d 577.
While there is no bright line rule for valuing goodwill in a California divorce, courts generally utilize one of two approaches:
Market Value Approach: Analysis of what a willing buyer would pay in cash for the community business if it were sold at the time of separation or divorce.
Capitalization of Excess Earnings: Analysis of the net income of a professional practice for one year, subtracting of a reasonable salary for a person of comparable experience, and multiply by a number which is usually determined by an expert forensic accountant.
In any event, goodwill cannot be valued by any method which takes into account post-marital efforts of either spouse.
Where Do You Go From Here?
If you are a business owner, or you are the spouse of a business owner, the issue of goodwill either exposes you to liability or gives you negotiating power in division of your estate upon divorce in California. Call one of our Southern California family law attorneys today to set up a consultation and talk about your rights and responsibilities.
THIS INFORMATION IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY. EVERY CASE IS DIFFERENT AND THIS GUIDE SHOULD NOT BE CONSTRUED AS LEGAL ADVICE. THIS ARTICLE DOES NOT CREATE AN ATTORNEY CLIENT RELATIONSHIP BETWEEN THE READER AND ITS AUTHOR. IF YOU HAVE LEGAL QUESTIONS, CONSULT WITH A FAMILY LAW ATTORNEY.