Evaluating "Goodwill" during Asset Division

In a contested divorce proceeding, valuation of community assets is often the most complicated and controversial issue.  Couples who seek a divorce often spend a lot of time (and money) posturing for the most favorable division of assets.

Particularly when businesses are involved, navigating the contours of asset division can become a hard and tricky task.  Although valuing tangible assets – like equipment – is usually a straightforward procedure, there can also be numerous “intangibles” which play a significant role (like professional goodwill).

Goodwill is essentially the value placed on someone’s reputation that will probably generate future income.  To complicate matters, there is no set formula for how to value this.  Instead, courts look at a number of factors such as the practitioner’s age, health, past earning power, reputation, skill and knowledge, and comparative future success.

In a recent Arizona Court of Appeals Decision (Walsh v. Walsh, http://azcourts.gov/Portals/0/OpinionFiles/Div1/2012/1%20CA-CV%2011-0269.pdf), the court addressed a dispute about the value of professional “goodwill” generated over the course of the marriage.

In Walsh, the husband was a partner in a large law firm.  He proposed that the value of his “goodwill” should be limited to tangible, “realizable benefits” he had, such as his stock options pursuant to a stockholder agreement.

The wife – also an attorney – disputed that evaluation, claiming that her husband could withdraw from the firm and retain his reputation and the business which comes from client loyalty, and that this goodwill had a significant value to be divided.

The Court of Appeals agreed that goodwill should not have been limited to the “realizable benefits” of the stock options and that the lower court must examine whether there is a value to the intangible asset.

The court limited its holding by declaring that goodwill is not the same as future earning capacity – “We underscore, however, that our holding does not equate goodwill with future earning capacity.  While future earning capacity may be evidence of goodwill, the earning capacity is not itself a divisible community asset.” – but distinguishing between the two is “not itself” a precise science.

Decisions like the one in Walsh highlight the complexities involved in dissolution actions involving community businesses and business interests.  An attorney who is aware of these issues can make favorably settling a contested divorce much easier (and far less costly).  Furthermore, because evaluation of assets like goodwill is largely at the discretion of the court, an attorney with a great deal of knowledge and courtroom experience is better equipped to protect your interests if a pre-trial resolution cannot be reached.

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