Is Your Ex Entitled to Your Business Good Will?

When a divorcing couple owns a business, how that business gets divided in the divorce case can raise some questions. If one of the two runs the business and intends to continue running it after the divorce, the court will be faced with the task of assigning a value to the operation so that the “out-spouse” – the spouse who is not operating the business – receives his or her fair share of the value of that business.

So how does the court value the business if the business itself is not being sold?

In the ordinary case, the parties can hire a forensic accountant to take a look at the books of the business and attempt to derive the value of the business’ assets set off against any debts the business owns. Additionally, the accountants will look to any receivables the business may be able to collect on, as well as any “bad debts” that the business likely will never be able to collect. But the value of the business’ assets and any receivables it has are not the only indicators of value.

The forensic accountant will also look to “good will” – the expectation that the business will continue generating income over the coming years because of its reputation or standing in the community. This future income stream in some cases may be extremely valuable to the spouse who is keeping the business – and thus also valuable to the spouse who is walking away.

In some cases, the business may have no real value outside of good will. For instance, if a business has no real assets, or if the business is burdened by significant debt, good will may be the only avenue for the out-spouse to see any value attributed to a business he or she is leaving behind. The calculation of good will can be complicated, and may depend to a high degree upon the actual nature of the business. If the business is similar enough to other businesses that have been sold in the recent past, the sales price may be a good indication of value. But if the business is unique, the accountant may have to dig deeper in order to form an opinion as to the good will component of the business’ value.

And even if the accountant identifies a good will component to a business, that does not always mean that the out-spouse is entitled to share in it. California courts have ruled that “personal” good will follows the spouse who generates it. So in situations in which the expectation of future income comes not from the business but directly from the person who operates it, good will may not be considered to be community property – and thus may not be divisible in the divorce case. These determinations are always done on a case-by-case basis, though, and no two situations are identical.

Forester Purcell Stowell PC attorneys are well-versed in the area of business valuation and regularly work with outstanding resources such as accountants and other qualified experts.

Contributed by Neil M. E. Forester, Certified Family Law Specialist, Forester Purcell Stowell PC Family Law Attorneys, based in Folsom, California.

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