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What is Goodwill as it Relates to Business Ownership in a Carlsbad Divorce?

On Behalf of | May 6, 2019 | Professional Practice & Business Ownership

What is Goodwill as it relates to business ownership in a Carlsbad divorce?  Goodwill is an important component in the valuation of a business ownership or professional practice in a North County or Carlsbad divorce.  Goodwill is an inherent part of many businesses, and while it may not have a precisely measurable value, the intrinsic value of Goodwill must be given consideration.

Goodwill is basically the “human” element of the business or professional practice.  For example, there are many dental practices who offer the same types of services.  However, the quality and compassion of the dentist and how they treat their patients will have a large influence on whether the clients remain with that practice or search for another.

Another example of Goodwill as it relates to business ownership in a Carlsbad divorce might involve a business based upon military contracts.  The business owner may have specific technical or scientific knowledge as well as an established group of contacts within a branch of the military who know and trust the business owner.  If you remove that specific person from the ownership and operational aspects of the business, the loss of the technical or scientific knowledge as well as the understanding of military contract process and the decision making contacts would have a negative impact on the future success of the business itself.

California law has established Goodwill to be “the advantage or benefit which is acquired by an establishment beyond the mere value of the capital stock, funds or property employed therein, in consequence of the general public patronage and encouragement which it receives from constant or habitual customers, on account of its local position, or common celebrity, or reputation for skill or affluence, or punctuality, or from other accidental circumstances, or necessities, or even from ancient partialities or prejudices.”

The Judge must consider many additional factors when establishing the value of Goodwill as it relates to business ownership in a Carlsbad divorce including (but not limited to) the age and health of the professional and their reputation for skill, knowledge and judgment, as well as years of experience and associated earning power.  Goodwill is considered to be a “proprietary” contribution that could only be made by a specific individual.

Just as in the calculation of the valuation of the business, the impact of Goodwill can substantially add or subtract from the actual monetary settlement of the community’s interest in the asset.