In Arizona, most assets acquired by spouses during the marriage are considered tangible assets. However, there may be some intangible assets that need to be divided between the parties in a divorce. It can be extremely difficult to place a value on an intangible asset. One example of an intangible asset is professional goodwill.
In the recent case of Walsh v. Walsh, the Arizona Court of Appeals addressed the issue of valuing professional goodwill. The husband and wife in that case were both attorneys. When the economy collapsed, the wife’s income from her marketing and public relations company fell dramatically. Meanwhile, the husband continued to earn substantial compensation.
During their divorce trial, the parties disagreed over the community’s interest in the husband’s professional goodwill. The husband took the position that his professional goodwill should be valued at $140,000, the stock redemption value of his stake in the law firm where he was a partner.
The wife’s expert, on the other hand, believed that the husband’s professional goodwill was worth closer to $1.3 million. The family court sided with the husband in finding that the husband’s professional goodwill was limited to the $140,000 “realizable benefit” contained in the stock redemption agreement, and that the wife’s expert’s valuation was based on “mere speculation.”
The Arizona Court of Appeals, however, rejected the family court’s calculation of the husband’s professional goodwill. The Appeals Court ruled that the family court should not have restricted its analysis of the community interest in the husband’s goodwill to “realizable benefits.” The Court added that, “the value of ‘goodwill’ is well established in the case law, and it cannot be eliminated by a recital in the corporate documents.”
The Court found that, “the family court should have considered Husband’s personal goodwill in valuing Husband’s law practice beyond his stock redemption interest in the firm.” The case was reversed and remanded to the family court to determine the value of the husband’s goodwill.