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The Divorce Encyclopedia

Term Definition Goodwill - the value of a business beyond the market value of any tangible assets.
Application in Divorce Goodwill is the favor that a business and its management win from the public by virtue of being up and running. It includes reputation, prestige, and company name.

Goodwill is without a basis unless a business is purchased. It is intangible and it cannot be amortized for tax purposes.

Goodwill is based on the observable phenomenon that when a business is sold, the sale price is greater than the value of its assets. Put another way, goodwill is that hard-to-calculate part of the whole that is greater than the sum of its parts.

As it applies to divorce actions, the goodwill is often a point of contention: is that intangible business or professional asset marital or separate property or in some cases both at the same time? In the case of professional practices, the value of the goodwill may be substantially greater than the value of the physical assets.

In divorce actions, courts must grapple with the distinction between 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.

In some businesses unrealizable goodwill may be the business. 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 general, most courts hold that realizable goodwill is marital property and that its fair market value for equitable distribution purposes includes its goodwill, not merely its total asset value.

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." Or the craftsman, in the case of the shoe repair shop.

Courts wrestle with the treatment of personal goodwill because it lacks a present value and a fair market value. In a 1991 Florida case, a court said that "[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."

In divorce actions today, courts increasingly must be deal with the goodwill value of professional degrees acquired during the marriage, particularly in situations where one spouse forsakes a career for the benefit of another and the promise of a payoff of enhanced earnings as a result of the degree.

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

As it applies to divorce, a majority of American jurisdictions hold that personal goodwill of a business is unrealizable and cannot be classified as marital property. Enterprise goodwill -- "the corporate, transferrable reputation of the business itself" -- is realizable and must be included in the marital estate. "In the business world, the whole often has much greater value the sum of its parts. 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."

The ALI position is that goodwill is marital property "to the extent that it is separate from the spouse’s earning power."

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