Disclaimer: This article does not constitute legal advice. If you have any questions about your individual situation it is best to seek the advice of an experienced legal professional.
Professional goodwill is a concept in California divorce that falls under the banner of business valuation. Professional goodwill, often called personal goodwill, determines how much value can be placed on aspects of the business that exceed fair market value. It is an intangible asset that comprises value that the business gains because of one person’s professional reputation, professional contacts, client relationships and skills. It is part of the delicate process of valuing a business in which both spouses may have a community property interest, but where one spouse’s skills, efforts and reputation are a unique feature of the business’s value. When valuing a business that both spouses have an interest in, professional goodwill may need to be evaluated outside the framework of community property, with a specific portion that is designated as professional goodwill going to the spouse who brings this value to the business.
What is Professional Good Will?
Valuing a business or professional practice in a California divorce is not simple. As well as being logistically complex it can be emotionally fraught, especially if one spouse has poured their time and energy into the business. A business may have a value on paper stemming from the balance sheet and what the market will pay for a similar business. However, each business is unique, and a good proportion of the value of a business could be the result of a labor of love that required one or both spouses to cultivate professional relationships and good standing in the community. In many cases, a business’s success and popularity is down to one person’s highly specialized personal brand. Goodwill is what is known as an “intangible” asset that doesn’t sit on the business’s balance sheet, but adds unique value to the business compared to other similar businesses.
How Do You Decide if Professional Good Will is Marital Property?
Determining the value of personal or professional goodwill in a business is part of the process of valuing a business in divorce. It is also part of the process of determining what is marital and what is separate property.
The valuation of the business isn’t the only element in determining how professional goodwill is to be apportioned. You must also determine whether the professional goodwill was mingled with general “enterprise goodwill,” which is the goodwill of the business as an entity. The general goodwill attached to the business, comprising the business’s reputation and client base, could be part of marital property and both spouses could be due an interest in this.
It’s also important to look at when the business was started. If it was started by one of the spouses before the marriage, then a portion of the business’s value, including goodwill, will be excluded from community property.
If the business was started after the marriage, then you have to decide what portion of the businesses value was due to professional goodwill by one party alone, and whether that portion of the value should be excluded from the community property. This is a highly complex and sometimes emotional determination that should be made following a thorough analysis of community property and comprehensive valuation of the business.
Why is Professional or Personal Goodwill Important to a Business?
Professional and personal goodwill is an increasingly important part of business valuation for any business that heavily relies on personal branding. You don’t have to be an Instagram influencer. Cultivating a presence on social media and relationships within the community is common business practice for many professionals, including lawyers, consultants and coaches. Celebrities and entertainers often have significant value attached to their professional goodwill. One example is Christina Ricci, who kept the value of her professional goodwill in her divorce.
Why Should You Seek Support When Determining Professional Goodwill in Divorce?
As you can imagine, the decision about professional and personal goodwill can be both emotionally and financially fraught. It is an intangible asset that often represents someone’s individual efforts, extra hours of labor and the relationships they have built within their community. This is why you need to work with divorce mediators who are extremely sensitive to both the financial and emotional consequences of valuing goodwill. Conflict should be avoided, as it will only deplete your shared resources and could even damage the credibility or personal brand of your business. One advantage of choosing divorce mediation when issues like professional goodwill are at stake is that mediation is a completely confidential process. Unlike a traditional adversarial divorce that takes place in a courtroom, it is not public. If you are both in agreement you can also include non-disclosure terms in your divorce agreement which may shield your business from any negative publicity associated with your divorce.
Our Services and How We Can Help
We are highly skilled and compassionate West Coast Divorce Mediators who help divorcing spouses navigate the most complex financial and emotional dimensions of a divorce. We understand that business, finances and emotions often mingle. We help divorcing spouses to come to respectful, equitable agreements where they can be assured that the process has been thorough, transparent and fair to both parties.
We help divorcing spouses with complex assets to have an efficient divorce by handling many of the aspects of the divorce such as paperwork, business valuation, appraisals and financial planning. We have offices in San Diego, CA, Silicon Valley and Berkeley, CA. We can mediate your divorce in-person or remotely, facilitated by secure private servers. Please contact us to learn more about our high level West Coast Divorce mediation services.
