Goodwill May Not Include an Expectation of Future Earnings

In Fortier, a few years prior to divorce, an incoming partner purchased 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 attorney 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 attorney 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