The U.S. Supreme Court once described goodwill as “that element of value which inheres in the fixed and favorable consideration of customers, arising from an established and well-known and well-conducted business,” in Des Moines Gas Co. v. City of Des Moines, 238 U.S. 153, 165, 35 S.Ct. 811, 814 (U.S. Sup. Ct. 1915).  Personal goodwill, then, is the asset that generates cash profits of the enterprise that are attributed to the business generating characteristics of the individual, and may include any profits that would be lost if the individual were not present.  

Nail v. Nail, 486 S.W.2d 761 (Tex. 1972): “[I]t cannot be said that the accrued goodwill in the medical practice of Dr. Nail was an earned or vested property right at the time of the divorce or that it qualifies as property subject to division by decree of the court. It did not possess value or constitute an asset separate and apart from his person, or from his individual ability to practice his profession. It would be extinguished in event of his death, or retirement, or disablement, as well as in event of the sale of his practice or the loss of his patients, whatever the cause.”  

Geesbreght v. Geesbreght, 570 S.W.2d 427, 435-36 (Tex. Civ. App.–Fort Worth 1978, writ dism’d): “‘Good will’ is sometimes difficult to define. In a personal service enterprise such as that of a professional person or firm, there is a difference in what it means as applied to ‘John Doe’ and as applied to ‘The Doe Corporation’ or ‘The Doe Company’. If ‘John Doe’ builds up a reputation for service it is personal to him. If ‘The Doe Company’ builds up a reputation for service there may be a change in personnel performing the service upon a sale of its business but the sale of such business naturally involves the right to continue in business as “The Doe Company”. The “good will” built up by the company would continue for a time and would last while the new management, performing the same personal services, would at least have the opportunity to justify confidence in such management while it attempted to retain the ‘good will’ of customer clients of the former operators. At least the opportunity to have time to try to preserve the ‘good will’ already existent and to use it as an entrance into the identical field of operations in a personal service type of business would be present where the name of the business is a company name as distinguished from the name of an individual. Therein does it have value, plus the value of the opportunity to justify confidence in the new management by the customer/clients of the predecessor owner(s). It is as applied to the foregoing that we consider Emergency Medicine to possess what we treat as ‘good will’ as part of its worth and value under the circumstances of this case, and therefore an asset which would have value to some extent apart from John’s person as a professional practitioner.”  Austin v. Austin, 619 S.W.2d 290, 291-92 (Tex. Civ. App.–Austin 1981, no writ): “The good will of an ongoing, noncorporate, professional practice is not the type of property that is divisible as community property in a divorce proceeding. [citing Nail.] . . . When good will is not attached to the person of the professional man or woman, it is property that may be divided as community property. [citing Geesbreght.] . . . Once a professional practice is sold, the good will is no longer attached to the person of the professional man or woman. The seller’s actions will no longer have significant effect on the good will. The value of the good will is fixed and it is now property that may be divided as community property.”  

Valuing the commercial or enterprise goodwill of a going business requires the valuator to differentiate the commercial or enterprise goodwill (or goodwill that can be transferred in a sale of the business) from the personal goodwill of the business owner (goodwill that cannot be transferred in the sale of the business if the owner leaves the business). This differentiation is complicated by the fact that some of the personal goodwill may actually transfer with the sale of the business if (i) the previous owner continues to work for the business, (ii) lends the use of his name or image to the business, or (iii) the previous owner has died, retires, relocates to another market or agrees not to compete with the business. To determine commercial or enterprise goodwill the valuator must determine the fair market value of the business, then subtract the value of tangible assets and the value of intangible assets that are enforceable under contract or other law or are separable, leaving a residual goodwill. The valuator next determines the reduction in profits resulting from the seller leaving the business, or competing with it, as the case may be. Capitalizing the remaining profit yields the business’s commercial or enterprise goodwill.

Separating a marital business that has personal goodwill can be one of the most contentious and litigious arguments in a divorce proceeding. If you have a business that has personal goodwill, collect everything you can to prove people buy from your business because of YOU, and not necessarily the products or services you provide. At the end of the day, it will be the judge’s discretion as to how much of the business’s value is personal goodwill verses enterprise goodwill

If you have questions about your businesses valuation as it relates to a divorce and community property, you absolutely need a seasoned, aggressive family law attorney on your side. The attorneys at The Werner Law Group have fought this issue ad nauseum in court rooms all over Texas. Don’t hesitate to reach out to us by text seven days a week at 361-648-6888.