Attorney
In a New Mexico divorce, many times a business’s goodwill is treated as community property, which must be valued and divided between spouses. But the amount that’s actually subject to division depends on whether that goodwill belongs to the business itself or to the individual who runs it. That distinction, between enterprise goodwill and personal goodwill, is one of the most consequential issues in any high-asset divorce involving a business or professional practice.
What is Goodwill?
Goodwill is the intangible value of a business. It’s what kids today might call “vibes.”
Goodwill is what makes an established practice worth more than the sum of its equipment, lease, and bank accounts. It’s the practice’s reputation, its patient or client base, its referral relationships, its systems, and its standing in the community.
It develops quietly over years of showing up and doing good work. Because of this, most business owners view it more as the fruit of their labor than an asset. But in a divorce, it sometimes becomes precisely that: an asset that must be identified, valued, and divided.
Why Goodwill is Up for Grabs
Figuring out how to cut something that’s intangible in half is something only lawyers and magicians would ever attempt. But the reason this is part of New Mexico’s divorce law is more practical than you might expect.
Due to our Spanish heritage, New Mexico has always been a community property state, where men and women are treated as equals (or at least more so than under English common law). Then the post WWII era hit, women’s rights were more strongly emphasized, and divorce became less stigmatized. In response, state policy makers and judges made a lot of changes to our state’s divorce laws in the 70s and 80s.
In 1973, we became the first state to fully adopt no-fault divorce. Once divorce was easier, it became more common, and courts had to start wrestling with questions they had never really thought about before. Like, how do you compensate the spouse who stayed home, took care of the kids, and made it possible for their partner to start a business or build a professional practice?
The New Mexico courts were struggling with this, so they took a look at what other states were doing, and saw Washington and California (which are also community property states) including professional goodwill in the marital estate. New Mexico formally adopted the practice in 1980 with Hurley v. Hurley, and reinforced its importance in 1986 with Mitchell v. Mitchell (which should not be confused with the same named case, on the same topic, that came out of Arizona the following year).
Since then, it’s been settled that in many cases, professional goodwill is a community asset. But that doesn’t mean it is not a hotly contested issue in many New Mexico divorces.
Enterprise Goodwill vs. Personal Goodwill: Why the Distinction Matters
The big reason goodwill remains a contentious topic is that it’s tricky to put a price tag on something you can’t see. That opens the door for creative interpretations of what counts as goodwill and how much it is worth.
Going back to Mitchell v. Mitchell, you had the court saying it recognized that you can’t classify a CPA license or the right to practice in the profession as community property, even if the value of the business built with that licence and right should be divided between spouses. That sowed the seed for what has become an important distinction: enterprise goodwill vs. personal goodwill.
These aren’t terms you are going to find in the New Mexico state statutes or in leading caselaw (although it has been explicitly addressed in other states). But they certainly mean something when you are at the negotiation table.
- Enterprise goodwill is value that belongs to the business as a going concern. It’s the kind of goodwill that would survive if the current owner stepped away. It includes the practice’s established name and reputation, its location, its systems, its recurring client or patient base, and its relationships with referral sources that aren’t dependent on any one individual. Enterprise goodwill can, in theory, be transferred to a new owner. In New Mexico, it is typically treated as a marital asset subject to division.
- Personal goodwill is value that exists because of a specific individual. It’s their license, their skills, their reputation, their particular relationships. If that person left the business, this goodwill would leave with them. It can’t be sold separately or transferred to a buyer, so it is generally treated as a separate asset.
The line between the two isn’t always clean. A physician whose practice has built a strong referral network may have both: enterprise goodwill in the network itself, and personal goodwill in the relationships she specifically maintains. A solo attorney may have almost entirely personal goodwill, while a mid-sized law firm with multiple partners and a recognizable name may have substantial enterprise goodwill independent of any one partner. Getting this allocation right (or wrong) can shift the value of the marital estate by hundreds of thousands of dollars.
How Goodwill Is Actually Valued
Once goodwill is identified, it’s time to figure out how much it is worth. Several methodologies can be used, and the choice of method can significantly affect the outcome.
- The income approach looks at the earnings the practice generates, strips out a reasonable compensation for the owner’s personal services, and capitalizes the remainder as a business asset. This approach often produces higher valuations for established, profitable practices.
- The market approach compares the practice to recent sales of similar businesses in the same specialty and market. This can be useful where comparable sales data exists but is less reliable in niche specialties or smaller markets.
- The excess earnings method attempts to identify earnings attributable to the business itself by estimating how much the owner could earn simply for doing the work — and attributes that excess to goodwill.
In contested cases, each side typically retains its own valuation expert, and the resulting figures can differ substantially. This is why it is important to work with an attorney like Bob Matteucci, who is as comfortable talking about finances as he is family law. Thanks to his MBA degree and the years he spent running his family’s retail shoe business, Bob can really dig into these different valuation and argue for what is fair.
Serving Families with Dignity & Compassion
If you own a business or professional practice in the Albuquerque area, many times it will be treated as a marital asset during a divorce, goodwill included. The relevant questions are then how much of that goodwill is enterprise goodwill, and how it will be valued.
Bob is ready to help you identify, classify, and put a price on this invisible but important asset so you and your former spouse can move forward. Contact Matteucci Family Law today to set up a meeting and discuss your case.