Legal Concepts of Goodwill: Texas Law

Walters Gilbreath, PLLC

As mentioned in a previous article, each state has different laws regarding goodwill and divorce. First, Goodwill value comes from the business’ tangible assets subtracted from the total business value. Therefore, business value must be determined first.

In Texas, it is common for you to further divide goodwill into enterprise and personal. Enterprise refers to the goodwill of the business itself. On the other hand, personal refers to the value that an individual brings to a company. So, anything that the spouse involved in the business brings to the business is personal goodwill.

States are split between a few different viewpoints when it comes to how goodwill gets treatment in a divorce. In this article, I will give a brief explanation of these different viewpoints. I will then discuss in greater detail the laws in Texas related to how goodwill gets treated in a divorce.

Different Positions On Goodwill And Divorce

There are eight states that are undecided about it. These states are:

  • Alabama
  • Idaho
  • Georgia
  • Iowa
  • South Dakota
  • Maine
  • Ohio
  • Vermont

Thus far, all states but Alabama have made some changes or decisions regarding goodwill in divorces.

The remaining states are split into three different approaches to the matter. The first approach is the one that most states abide by. It states that personal goodwill is separate property in a divorce, while enterprise goodwill is considered marital property. The states that follow this rule include:

  • Alaska
  • Connecticut
  • Maryland
  • Delaware
  • Arkansas
  • Hawaii
  • Illinois
  • Indiana
  • Texas
  • Massachusetts
  • Florida
  • Mississippi
  • Missouri
  • Nebraska
  • Rhode Island
  • New Hampshire
  • Oregon
  • Pennsylvania
  • Wyoming
  • Oklahoma
  • Utah
  • Virginia
  • West Virginia
  • Wisconsin
  • Minnesota

Another, less popular approach, states that all goodwill is marital property. Therefore, both spouses have a claim to all goodwill in the divorce. The states that hold this view are:

  • California
  • North Carolina
  • Kentucky
  • Michigan
  • Nevada
  • Colorado
  • New Jersey
  • New Mexico
  • Washington
  • New York
  • Montana
  • North Dakota
  • Arizona

The final approach to goodwill and divorce is the least popular. The states of Kansas, Louisiana, South Carolina, and Tennessee don’t consider goodwill marital property at all.

Texas Law

There are many different cases in Texas that have determined laws related to goodwill and divorce. A few notable ones include Austin v. Austin, Geesbreght v. Geesbreght, and Nail v. Nail. A few of the key findings in Austin v. Austin include:

  • Goodwill of a non-corporate, ongoing, professional practice does not constitute community (marital) property in the divorce.
  • Goodwill not attached to a person (the man or woman in the marriage) can constitute community property.
  • When the professional practice is sold, goodwill goes from personal to enterprise. This means that it can be divided between the parties in the divorce.

A few key notes to consider from Geesbreght v. Geesbreght include:

  • There is a difference between goodwill that applies to a person (personal goodwill) and goodwill that applies to a company (enterprise goodwill).
  • Enterprise goodwill continues even after the company sells, while personal goodwill ends with the sale of business.
  • A few findings in Nail v. Nail include:
  • Accrued goodwill is not considered vested or earned property at the time of divorce.
  • Accrued goodwill is not considered a marital property that can be split between spouses at the time of divorce.

Texas Divorce And Goodwill

If you face divorce in Texas, different types of goodwill will be divided differently. Whether you own a business or your spouse does, it is important that you understand what you are entitled to in the divorce. If you own the business, you will be able to keep all of your personal goodwill. Your spouse will not have a claim to this type of goodwill.

But, you need to distinguish this type of goodwill from enterprise goodwill. You have to do this by proving that it exists and what it consists of in court. On the other hand, the enterprise goodwill from your business will constitute marital property. This means that your spouse has a right and a claim to some of this goodwill. It will get divided between you and your spouse in a divorce.
On the other hand, if your spouse owns a professional practice or closely held business, the opposite is true. You will have no claim to the personal property in the business, but you will have a claim to the enterprise property. You need to prove what you should get in the division of enterprise property in court.

Hiring A Lawyer

Whether you own your business or your spouse owns the business, you need to prove what you are entitled to regard goodwill during the divorce. The best way to accomplish this is by hiring an appraiser of the business to determine goodwill, and a lawyer to prove what you are entitled to in court. Experienced divorce lawyers will have experience in many common areas of divorce, such as child custody and spousal support and will also know how to handle the division of assets that are not always common in divorce, including businesses and goodwill. In my next article, I will discuss some of the other aspects related to dividing a business in a divorce.

In the next blog post, I will discuss some common ways to resolve ownership issues while moving forward with your divorce.

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