Goodwill May Not Include an Expectation of Future Earnings

The value of goodwill should not be calculated based upon potential income because earnings after divorce are not community property.

In Fortier, a few years prior to divorce, an incoming partner purchase a share in husband’s medical practice.  In the divorce trial, husband’s divorce lawyer argued that this recent sale demonstrated the business’s market value and goodwill.  Wife’s divorce lawyer disagreed and wife’s accountant presented alternative goodwill values based on the excess earnings formula. The divorce court agreed with husband’s divorce lawyer's argument and wife’s divorce lawyer appealed.

The Second District Court of Appeal affirmed the divorce court’s decision to calculate goodwill based on the market approach because, "the value of the community goodwill is simply the market value at which the goodwill could be sold upon dissolution of the marriage," which the sale to the incoming partner demonstrated.  The Court of Appeal rejected wife’s expert’s excess earnings formula because it relied upon potential future post-separation income, which is not community property.

In re Marriage of Fortier (1973) 34 Cal. App. 3d 384