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The difficult and costly road to prove Goodwill in A divorce

by | Jan 29, 2017 | Community Property Asset, Firm News, Separate Property Assets

The concept of proving goodwill in divorce proceeding seems rather complex and vague.  The idea that a business can be divided as community property is a relatively new idea that the courts have to deal with.  How to determine the valuation of a business requires alot of time and forensic accountants.  The arguments laid out by each party drive the Courts to have to decide what is separate property and what is community property.  A long term marriage makes this descision even more complicated. The complication lies in the evaluation of a community property asset that sometimes does not have a easy financial determination.  It may be even considered speculative to determine what is goodwill of a business.  Is it the receipts that come in monthly? minus the costs and expenses.  Or is it something more vague and uncertain that must be evaluated on a case by case basis?

To place more complication on the matter.  The goodwill might not all be community property but also separate property thus tracing property to its source will be another issue that must be determined by the court.  This often cannot be an easy task given the length of marriages and the commingling of separate property assets over a period of time while the couples are married. In addition the earnings of a business and the future receipts that will occur although speculative seem to be the only way to evaluate a business. However, Courts still will only use this future earning determination as a factor and not the only method to evaluate a business because of its uncertainty.

In addition, the Courts still cannot determine goodwill based on economic future earnings alone.  The Court must also consider such factors as the parties age, health, past proven earning power and professional reputation in the community.  And the Court must consider the personality traits of the professional involved. The Court must examine the professional judgment, skill and knowledge of their business which would be rather complicated and require expert witnesses to cooberate the actual veracity of the skills of the professional.   Once the expert witnesses are testifying the Court will continue its investigation into the professionals experience by comparing their skills to other professionals.  Also the Court will look at the nature and duration of his business so that they can determine whether goodwill even exists in the business.

Courts must be cautious to fix a market value to a business because of the ever changing market values that can alter goodwill in the future. Accompanying the assets of goodwill there is also the liability that must be taken into account. Often this can degrade the value and thus make the business vulnerable to devaluation in the long term.  Thus dividing the business fairly can be fraught with much uncertainty as to it future value. Finally the Court must determine if there are fixed assets such furniture or ownership in property that can easily be determined by the court to place a value on.