What Happens to a Professional Practice Upon Divorce?
Professionals with an ownership interest in their practice will likely find that there is a challenge in court regarding how to value their practice for purposes of distribution. This question is not settled by a partnership agreement defining the partner’s interest in a firm, and sole practitioner’s may find their practice exceeds the expected book value. Courts pay close attention to “mechanical” valuation techniques, but also look to the “goodwill” that the partner brings to the business.
Goodwill is essentially a reputation that will probably generate future business, although it also includes factors such as the professional’s specialization and overall context of their professional service. This is a distinct concept from future earnings based on a professional license or a medical degree. While these may also increase the probable income of the professional, they are too speculative to be deemed property for purposes of equitable distribution.
The philosophy underpinning the inclusion of goodwill is that a professional’s spouse contributes to their reputation throughout the marriage, and should therefore share in the benefits that this asset provides. Goodwill is far from being a small concern, as it can amount to well over half of the practice’s total valuation. The exact value of goodwill is difficult to calculate, and battles between expert forensic accountants can lead to a wide range of goodwill values determined by the Courts.
Understanding, defining, and valuing goodwill is a complex legal subject and so consultation with a qualified matrimonial lawyer is highly recommended when engaged with these types of legal questions.