In most professional practices, the value of the goodwill may be substantially greater than the value of the physical assets. The calculation of goodwill, which the favor that a business and its management win from the public by virtue of being up and running, can be very difficult because in may include realizable goodwill, which is asset that an owner can convert to cash by selling his or her business on the open market, and unrealizable goodwill, which is an asset such as the business and marketing skills of the owner.

Very often professional practices are closely held corporations, which are privately owned. In divorce, these entities must be appraised by various experts who use different methods to place a value on the corporation for purposes of marital distribution. Many factors -- including fair market value versus fair value, goodwill, salaries versus distribution of profits, return on capital -- make this calculation difficult and subject to dispute in divorce actions. Very often one spouse (usually the husband) may be far more emotionally attached to the business than the other, and he may be far more threatened. In some cases, part of the value of the business may be separate property and the remainder marital property, as in the case where one spouse had established the practice before he or she married.

In general, most courts hold that realizable goodwill is marital property. The courts take a variety of positions in the case of unrealizable goodwill. Here, courts have said that goodwill is a division of future earnings; that unrealizable goodwill can never be recovered on the open market; and, as in one representative ruling, that "goodwill is indistinguishable from the owning spouse’s personal reputation." One court said: "[A professional] practice is personal to the practitioner. When he or she dies or retires nothing remains...the very nature of a professional practice is that it is totally dependant on the professional."

The difficulties of placing a value on goodwill are not limited to professionals. An established shoe repair shop in a birdcage-size shop may have substantial value as long as its founder, proprietor and sole employee is doing the work but almost no value to anyone else.

In the appraisal of a professional practice for property distribution purposes in a divorce action, the calculation of goodwill can become very difficult and almost always requires the services of experts.

See also Fair Value; Fair Market Value.

Don't Forget to Visit Our Online Support Community

Your Suggestion