Some Influential California Case Law Shaping Divorce Proceedings:
Like any other asset, a business or professional practice must be considered in the valuation and division of community property. To the extent that a business or professional practice has been developed during the marriage, there is a community property interest that must be dealt with in the dissolution.
The Market Approach:
In valuing a business weight should be given to market evidence of prices paid for businesses, however:
In Re Marriage of Lotz (1981) 120 Cal.App.3d 379, 174 Cal. Rptr. 618, and
In Re Marriage of Hewitson (1983) 142 Cal.App.3d 874, 191 Cal.Rptr. 392:
Concluded that relying solely on the price-earnings ratio of publicly-traded corporations to value closely-held corporations is error. One cannot compare the stock of a business owned by a single shareholder, responsible to no one, that cannot be easily sold, to a company that is publicly-held and easily sold. Furthermore, an owner of a private company may eliminate most of the corporate profits by paying himself a large salary; a public company will not arbitrarily eliminate profits by paying out large salaries.
Discounted Future Earnings Method:
Marriage of Fortier (1973) 34 Cal.App.3d 384, 109 Cal.Rptr. 915, and
In Re Marriage of King (1983) 150 Cal.App.3d 304, 197 Cal. Rptr. 716:
Concluded that since the philosophy of the community property system is that a community interest can be acquired only during the time of the marriage, it would then be inconsistent with that philosophy to assign to any community interest the value of post-marital efforts of either spouse. King similarly rejected a valuation where the appraisal was “replete” with references to post-separation efforts of husband.
Excess Earnings Method:
In re Marriage of Foster, 42 Cal.App.3d 577, 117 Cal.Rptr. 49 (1974)
In which the appellate court allowed the trial courts wide discretion to accept any legitimate method of valuation of a professional practice; and established the “excess earnings method” for valuing goodwill as a legitimate method.
Buy-Sell Agreements:
Whether the terms of a buy-sell agreement are followed depends on the circumstances. For example, the courts have held that buy-sell agreement may be considered but are not necessarily determinative in the valuation of professional practices, i.e., despite the buy-sell agreement, some business assets may be considered community property while others may not:
Marriage of Slater, 100 Cal. App. 3d 241, 160 Cal. Rptr 686 (1979), and
Marriage of Fenton, 134 Cal. App 3d 451, 184 Cal. Rptr. 597 (1982).
Concluded that the buy-sell was not binding, because it was not signed for the purpose of dissolution.
Marriage of Slater (1979) 100 Cal.App.3d 241, 160 Cal.Rptr. 686., and
Marriage of Nichols (1994) 27 Cal.App.4th 661,33 Cal.Rptr, 2d 13:
Concluded that, according to the buy-sell agreement, accounts receivables and work in progress are excluded from divisible community property assets, however, contrary to the buy-sell agreement the husband’s goodwill in the practice was divisible community property. According to the court, it was not an abuse of discretion for the trial court to value the husband’s shareholder interest in his law firm based on the formula set forth in his firm’s stock purchase agreement.
However, in regards to accounts receivables and work in progress this was contrary to:
Marriage of Lopez (1974) 38 Cal.App.3d 93, 113 Cal. Rptr. 237:
In which the court found that these assets should be included in valuing a law practice interest.
Professional vs. Business Goodwill:
California is a state which considers all goodwill, whether professional (personal) or business, part of and divisible as community property. Among the factors the court considers in valuing professional practice goodwill are the age, health, past earnings, and professional reputation of the practitioner.
If the business or practice is operated by one of the spouses, it still has a goodwill value, even if it could not be sold on the open market or if the professional stops earning money. California law treats the goodwill of a business or professional practice as a “going concern” to be valued as such. That is, the law assumes that the business will continue operating and will not lose any customers that would otherwise have been lost if it were sold or if the practitioner stopped earning money.
Marriage of Lopez (1974) 38 Cal.App.3d 93, 113 Cal. Rptr. 237:
In which the court suggests the following factors to define personal goodwill:
- The age and health of the individual;
- The individual’s demonstrated earning power;
- The individual’s reputation in the community for judgment, skill, and knowledge;
- The individual’s comparative professional success
- The nature and duration of the professional’s practice as a sole proprietor or as a contributing member of a partnership or professional corporation.
In re Marriage of Foster, 42 Cal.App.3d 577, 117 Cal. Rptr 49 (1974):
The value of community goodwill is not necessarily the specified amount of money that a willing buyer would pay for such goodwill. In view of the exigencies that are ordinarily attendant in a marriage dissolution, the amount obtainable in the marketplace might well be less than the true value of goodwill…. Goodwill is “the advantage…acquired by an establishment beyond the mere value of the capital stock, funds or property employed therein, in consequence of the general public patronage and encouragement which it receives from constant or habitual customers…. Goodwill is property of an intangible nature and is a thing of value.”
In re Marriage of Watts, 171 Cal.App. 3d 366, 217 Cal. Rptr 301 (1985):
In addressing the value of a surgeon’s interest in a partnership, the court found that if excess earnings are found, even if there is evidence that the professional practice cannot be sold, the court must determine there is a value to the practice.
However:
In re Marriage of Slivka, 183 Cal. App. 3d 159, 228 Cal. Rptr 76 (1986):
Found that there was no goodwill in a partnership in which the doctor was most similar to an employee… who is [merely] paid for services rendered, and
In re Marriage of Aufmuth, 289 Cal. App. 3d 446, 152 Cal. Rptr 668 (1979), disapproved on other grounds in In re Marriage of Lucas, 27 Cal. 3d 808 (1980):
Found that, in regards to a law practice, no goodwill is appropriate in certain situations.
Alternatively, and in most situations:
Marriage of Winn, 98 Cal. App. 3d 363, 367, 159 Cal. Rptr 554 (1979), putting a value on a horse slaughtering business with no sales value (quoting Kennedy & Thomas, Putting a Value on Education and Professional Goodwill, 2 Family Law Advocate 3, 4 (1979) with approval), and,
Haldeman v. Haldeman, 202 Cal. App 2d 498 (1962), regarding a pharmacist’s business:
Found that determining value by reference to comparable sales of other practices is inappropriate in a divorce proceeding because, a buyer of a professional practice has no assurance that the seller’s clients would continue their patronage of the practice and so he is not willing to pay to the seller a sum which represents to true value of the seller’s goodwill. A sale of goodwill in a divorce proceeding, however, involves a conveyance of goodwill from the silent partner to the professional. The later “sale,” then, has no impact upon the earnings potential of the practice and does not affect the value of the goodwill to the professional.
Professional Licenses and Education Degrees:
In California, where a spouse has earned a college degree or a professional license, the community estate is entitled to be reimbursed for the costs of acquiring the degree or license. These costs are normally limited to such things as tuition, fees and books. Unlike in other states, the law in California does not give the other spouse any right to a percentage of the enhanced earning ability of the spouse who acquired the degree or license.
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