Should 'goodwill' be considered divisible property in divorce cases?
A recent case in Mississippi involving a dentist and his wife has revived the debate over how goodwill is handled in divorce. "Goodwill" is the accounting term for a business's value apart from tangible assets. Firms of doctors, lawyers, plumbers, and electricians usually have more goodwill than assets, since the principal's reputation and skill drive the value of these businesses. In divorce cases involving such firms' owners, courts have wrestled with whether or not goodwill should be considered during the distribution of property. A chancery court valued the dentist's practice at $145,000, goodwill included. But the state supreme court disagreed: "Goodwill is simply not property," it ruled, "thus it cannot be deemed a divisible marital asset." Still, the matter is hardly settled nationwide. "Where a business can be sold, fewer states are finding that it isn't divisible than that it is," says Linda Elrod, Family Law Quarterly editor. Experts note courts often look twice at goodwill if a partnership or shareholder agreement specifies how to divide it if a firm dissolves.
MIKE HOFMAN was previously editor of Inc.com and a deputy editor at Inc. magazine, which he joined in 1996. The site was nominated for a National Magazine Award for Digital Media in 2010, and was named the best business website by Folio Magazine. In 2006, Hofman was part of a team of writers nominated for a Webby Award for best business blog. He lives in New York City. @mikehofman