California is a Community Property State. That means that, absent certain exceptions, all property that is acquired during marriage will be divided equally amongst the parties when the marriage is dissolved. Property that was inherited or acquired before marriage, will continue to be the separate property of the acquiring spouse. This rule applies not only to assets, but also to a business or professional practice which was set up and in operation before the parties were married. However, the community may be entitled to a credit to the extent that the value of the business increased during the time that the parties were married and living together. This means that the non working spouse of person who has an ownership interest in a professional practice, e.g., the wife of a dentist or lawyer, may be entitled to a portion of the monetary value of the practice of her spouse in a California divorce proceeding.
There are several methods which are used to determine the value of a professional practice in a California Divorce action. This article will focus on good will and when it would benefit the working and non working spouse.
Good will has been defined as the expectation of continued public patronage. It has also been defined as the expectation that old customers will continue to patronage the business or practice in the future. This is usually based upon the unique skill, reputation, and celebrity of the owner spouse. An example of good will would be a medical practice of a renowned surgeon, who has developed a reputation of getting excellent results. Courts look at the income of the earner spouse on the date of separation when determining the good will of a professional practice. This method of evaluation would benefit the non-working spouse of a professional when the parties were married for a long time, and the bulk of the practice was built up during the time that the parties were married.
Conversely, this method may not be good for a non-earner spouse who was in a short term marriage, and where the good will of the practice was established before the parties were married. For example, in Marriage of Rivers (1992) 130 Cal App 3rd 138, at page 150, a California court held that when ‘a husbands skill, experience and reputation were acquired 40 years prior to a relatively short term marriage,’ the court would not conclude that the good will of the practice was enhanced primarily as a result of community efforts.
The efforts of the working spouse, and the time frame in which those efforts were extended, are a key factor in determining which spouse will benefit from this method of valuation. The efforts of the working spouse are considered to be a community asset if extended when the parties were married. Conversely, efforts extended before the parties were married, are considered to be a separate property asset. Thus, when selecting the good will method to evaluate a professional practice, the factors to consider are the length of the marriage, the extent to which the value of the business increased during the time the parties were married, and, if the increased value is attributable to the efforts and reputation of the working spouse.