How does goodwill affect business division in a divorce?

There are many factors to consider when dividing business assets in a divorce, one of which is goodwill. Despite being an intangible asset, goodwill is part of the valuation process when determining the fair distribution of marital property. If you have a business to protect and are looking into divorce, here are a few things you should note.

What is goodwill?

Goodwill is an intangible asset referring to a business’s established reputation and customer loyalty. There are various factors behind a business’s goodwill, such as the owner’s name and reputation, the quality of the products and services and other similar factors. If clients loyally support a business regardless of the owner’s name and reputation, it refers to enterprise goodwill. Otherwise, it refers to personal goodwill.

Determining whether goodwill is a community asset

Texas laws divide assets into two categories: community and separate property. The presumption is that any property the spouses acquire during the marriage is part of the community property. The exception includes property acquired before the marriage, inheritance and personal damages awards, which are all separate property.

So, how about goodwill? Texas considers the type of goodwill when determining if it is part of the community property or is a separate property. The state considers enterprise goodwill as marital property and personal goodwill as separate property. This is, of course, on a case-by-case basis and the courts will still consider other factors during the property division.

Distribution of marital goodwill

Texas is a community property state, meaning that spouses equally own properties they acquire during the marriage. However, the state does not necessarily divide marital properties 50/50. Texas family courts distribute marital property justly and equitably, similar to the rules of equitable distribution of property.

Determining which property is community property can be confusing for many divorce parties. This is especially true when dividing business assets paired with goodwill. Understanding how property division works in your state can help ease your confusion.