A Closer Look at the Thorny Issue of Goodwill, Part 3:
How Texas Courts Have Distinguished between
Personal Goodwill and Commercial Goodwill
By Aaron Ballard, CPA/ABV1
1 Aaron Ballard, CPA/ABV is a partner in the Forensic, Litigation & Valuation Services group at Whitley Penn. He has spent his entire 16-year career providing litigation support and expert testimony regarding business valuations, tracing and characteriza-tion of marital assets, forensic accounting, and other financial issues. The majority of his practice is within the context of Texas divorce cases. Mr. Ballard can be reached at aaron.ballard@whitleypenn.com.
This quarter’s column is the third part in a series aimed at doing a deep dive into the valuation and divisibility of goodwill in the Texas divorce context. The first column sought to explain the different components of the value of a business and where goodwill fits in, while the second column analyzed different definitions and types of goodwill. In this column, I offer a summary of the factors cited by Texas courts in distinguishing between personal goodwill and commercial goodwill.
Goodwill is a dreadfully thorny concept. When grappling with it—particularly when attempting to distinguish between commercial goodwill and personal good-will—it is easy to quickly find yourself lost at sea. What exactly are we talking about when we talk about personal goodwill? What are the factors that cause goodwill to attach to the person as opposed to the business? There are no easy answers to these questions. Looking to case law only gets you so far. How a court in a particular case came down on the goodwill issue is highly dependent on the facts of the particular case and the evidence and arguments presented (or lack thereof). Nonethe-less, a review of case law in Texas is instructive in so far as it sheds light on the factors that Texas courts have considered in weighing this issue.
Neither the Texas Constitution nor the Texas Family Code explicitly address the issue of goodwill. Texas’s position that personal goodwill is not divisible upon divorce, but commercial goodwill is, comes from the Supreme Court of Texas’s landmark decision in Nail v. Nail, 486 S.W.2d 761, 763-64 (Tex. 1972). Since Nail, there have been more than two dozen courts of appeals cases addressing the issue of goodwill in the Texas divorce context. Texas courts have also addressed the issue of goodwill in other contexts, most notably cases involving partnership dissolutions. There are two Texas Supreme Court cases dealing with the issue of goodwill in that context—Rice v. Angell, 73 Tex. 350, 351, 11 S.W. 338, 338 (1889) and Salinas v. Rafati, 948 S.W.2d 286, 286 (Tex. 1997)—as well as other courts of appeals cases addressing goodwill in that context.
I reviewed the primary cases in Texas in the divorce and business dissolution contexts which attempt to differentiate between personal goodwill and commercial goodwill. Below is my attempt to summarize the factors that Texas courts in divorce and business dissolution cases have looked to in separating personal goodwill from commercial goodwill:
Summary of Factors Cited by Texas Courts in Distinguishing between Personal Goodwill and Commercial Goodwill
Divorce and Business Dissolution Cases
Factor
Case
Type of Business
Excerpt
Personal Goodwill Factors
Knowledge, skill, ability, experience
Nail v. Nail, 486 S.W.2d 761
Sole proprietor ophthalmologist practice
“based as it is on his personal skill, experience and repu-tation”; “professional good will…attaches to the person of the professional man or woman as a result of confidence in his or her skill and ability”
Allen v. Allen, 704 S.W.2d 600
Beauty salon
Rejects a claim that personal goodwill existed stating “there was no evidence in this case that any professional goodwill attached to the appellant as a result of confidence in her skill and ability.”
Rathmell v. Morri-son, 732 S.W.2d 6
Independent insur-ance agency cor-porations
Cites testimony regarding the husband’s “specialized knowledge of the problems and solutions peculiar to insur-ing businesses and associations” as evidence of personal goodwill
Finch v. Finch, 825 S.W.2d 218
Car shop
Finds commercial goodwill because the goodwill “existed apart from appellant’s…skill and abilities”
Guzman v. Guzman, 827 S.W.2d 445
Solo CPA practice
Cites various cases and focuses on whether goodwill existed independently of the “professional’s personal skills”
Von Hohn v. Von Hohn, 260 S.W.3d 631
Contingency fee law firm partnership
Says there was no dispute that commercial goodwill existed “independently of the personal ability of the professional spouse.”
K.T. v. M.T., No, 02-14-00044-CV, 2015Tex. App. LEXIS 8558
Brokerage firm fi-nancial advisor
Says husband’s expert “relied correctly on Texas law con-cerning personal goodwill” and recounts expert’s testimony as such: “Because Husband has the clients, all of the good-will is personal to him ‘because . . . without that person’s in-volvement, without their time, toil, talent, skills, effort, and reputation, that business is not going to be there, and that’s the essence of personal goodwill.’”
In re Maynard, No. 07-23-00202-CV,2024 Tex. App. LEXIS 4562
Financial advisor
“any sale to MKD would have no value unless Husband con-tinued to use his personal skills and abilities (i.e., personal goodwill) to maintain the accounts.”
Salinas v. Rafati, 948 S.W.2d 286
Dissolved radiology practice partner-ship
“To the extent that the valuation of the dissolved partnership was based on the goodwill attributable to the personal skills and talents of the former partners, it improperly took into ac-count intangibles that were not partnership assets.”
Welder v. Green, 985 S.W.2d 170
Accounting firm partnership
“The issue here is whether there was goodwill attributable to Welder’s former partnership separate and apart from the skills, personalities, and attributes of the accountants them-selves and whether such goodwill survived the dissolution.”
Reputation
Nail v. Nail, 486 S.W.2d 761
Sole proprietor ophthalmologist practice
“based as it is on his personal skill, experience and reputa-tion”
Geesbreght v. Geesbreght, 570 S.W.2d 427
Prof. corp. provid-ing ER physician services at hospi-tals
“If ‘John Doe’ builds up a reputation for service it is personal to him”
Finch v. Finch, 825 S.W.2d 218
Car shop
Finds commercial goodwill because the goodwill “existed apart from appellant’s reputation…”
K.T. v. M.T., No, 02-14-00044-CV, 2015Tex. App. LEXIS 8558
Brokerage firm fi-nancial advisor
Says husband’s expert “relied correctly on Texas law con-cerning personal goodwill” and recounts expert’s testimony as such: “Because Husband has the clients, all of the good-will is personal to him ‘because . . . without that person’s in-volvement, without their time, toil, talent, skills, effort, and reputation, that business is not going to be there, and that’s the essence of personal goodwill.’”
Factor
Case
Type of Business
Excerpt
Personal Goodwill Factors (Continued)
Personality
Rathmell v. Morri-son, 732 S.W.2d 6
Independent insur-ance agency cor-porations
Cites testimony “that the key to the financial success of the Rathmell companies was John’s personality…” which helps one “get a foot in the door” as evidence of personal goodwill
Rice v. Angell, 73 Tex. 350
Insurance agency partnership (50/50)
“The issue is whether there was goodwill attributable to Ra-fati’s former partnership separate and apart from the skills, personalities, and attributes of the professionals them-selves and whether such goodwill survived the dissolution.”
Welder v. Green, 985 S.W.2d 170
Accounting firm partnership
“The issue here is whether there was goodwill attributable to Welder’s former partnership separate and apart from the skills, personalities, and attributes of the accountants them-selves and whether such goodwill survived the dissolution.”
Relationships and contacts
Rathmell v. Morri-son, 732 S.W.2d 6
Independent insur-ance agency cor-porations
Cites testimony “that the key to the financial success of the Rathmell companies was John’s…social contacts..” which helps one “get a foot in the door” as evidence of personal goodwill
Generating busi-ness/customers through personal efforts
Geesbreght v. Geesbreght, 570 S.W.2d 427
Prof. corp. provid-ing ER physician services at hospi-tals
Distinguishes one contract as more personal in nature be-cause “all, or nearly all, the services at Harris were per-formed by him…any ‘good will’ built up by and through sat-isfaction with John’s services would be…more personal to him”
Rathmell v. Morri-son, 732 S.W.2d 6
Independent insur-ance agency cor-porations
“It is undisputed that John was the major ‘producer’ in the companies, meaning he brought in most of the custom-ers.”
Business name is same as individu-al’s name
Hirsch v. Hirsch, 770 S.W.2d 924
Solo incorporated law firm
Holds that it is difficult to find commercial goodwill in a “pro-fessional corporation conducting business in that person’s name”
Solo nature of business
Hirsch v. Hirsch, 770 S.W.2d 924
Solo incorporated law firm
Holds that it is difficult to find commercial goodwill “where the entity is a one person professional corporation…”
Guzman v. Guzman, 827 S.W.2d 445
Solo CPA practice
Finds sufficient evidence there no commercial goodwill ex-isted because “the husband is the sole owner of the CPA firm”
Holland v. Holland, No. 14-92-00873-CV, 1993 Tex. App. LEXIS 2197
Sole proprietor trucking busi-nesses
“There is no evidence that Holland Trucking, a sole propri-etorship, possess goodwill attributable to the company apart from appellee.”
Nature of business as a professional practice
Nail v. Nail, 486 S.W.2d 761
Sole proprietor ophthalmologist practice
Holds that the goodwill in question was not an asset separate from “his individual ability to practice his profession”
Stephens v. Ste-phens, 625 S.W.2d 428
Chiropractic prac-tice
Interprets Nail to hold that “professional good will built up dur-ing a period of practice, of one of the professions such as the medical and legal, is not property to be taken into con-sideration in the property division to be made upon di-vorce…that it is applicable here in that the husband is a Doc-tor of Chiropractic.”
Welder v. Green, 985 S.W.2d 170
Accounting firm partnership
“There are two difficulties with ascribing goodwill to the pro-fessional partnership of Green & Welder as an asset to be evaluated and divided when the partnership dissolved: it was composed of professionals, and it was a partnership.”
Contracts in indi-vidual names as opposed to entity
Simpson v. Simp-son, 679 S.W.2d 39
Pathologist profes-sional corp. (50/50)
Notes that “the contracts for the services were between the two doctors and the hospitals and made no mention of the corporation” in holding that the trial court could properly find no divisible goodwill
Salinas v. Rafati, 948 S.W.2d 286
Dissolved radiology practice partner-ship
States that because a contract was in the name of a partner not the business, it was not a partnership asset: “Although Rafati had in the past benefitted from the contract with Mercy Hospital as a partner of Salinas, the provisions of the con-tract and the facts surrounding its execution lead to the con-clusion that it was personal to Salinas and was not a part-nership asset.”
Factor
Case
Type of Business
Excerpt
Commercial Goodwill Factors
Business name
Nail v. Nail, 486 S.W.2d 761
Sole proprietor ophthalmologist practice
“It is generally held that good will has no existence as prop-erty in and of itself, as a separate and distinct entity, but only as an incident of a continuing business having locality or name.”
Geesbreght v. Geesbreght, 570 S.W.2d 427
Prof. corp. provid-ing ER physician services at hospi-tals
Opportunity for good will to transfer exists “where the name of the business is a company name as distinguished from the name of an individual”
Finn v. Finn, 658 S.W.2d 735
Large law firm part-nership (Thompson & Knight)
Finds evidence of commercial goodwill because “the firm does not conduct business under the names of the senior partners, but rather operates under the names of two founding partners no longer practicing with the firm.”
Nowzaradan v. Nowzaradan, No. 01-05-00094-CV, 2007 Tex. App. LEXIS 1021
Primary care and surgical clinic with a staff of three phy-sicians
“the record reflects that the BCC clinic had significant com-mercial goodwill, due to its name, location, extended hours, client base, and ‘walk-in’ practice, all of which could poten-tially carry over to any new owner.”
Rice v. Angell, 73 Tex. 350
Insurance agency partnership (50/50)
“If the business had been conducted under an assumed name wholly distinct from the name of either partner, such, for example, as the Galveston Insurance Agency, it might be held that the probability that the patrons of the part-nership would continue to do business with any person or firm using that name constituted a valuable right and would be the subject of legal disposition upon a dissolution of the firm.”
Established loca-tion(s)
Nail v. Nail 486 S.W.2d 761
Sole proprietor ophthalmologist practice
Distinguishes professional good will from the “good will of a trade” which has been “localized”
Geesbreght v. Geesbreght, 570 S.W.2d 427
Prof. corp. provid-ing ER physician services at hospi-tals
Notes the “eight (8) different locations” in finding commer-cial goodwill
R.V.K. v. L.L.K., 103 S.W.3d 612
Group radiology medical practice
Dissent cites the “nineteen different locations” in making the point that it was clear the businesses had commercial good-will
Nowzaradan v. Nowzaradan, No. 01-05-00094-CV, 2007 Tex. App. LEXIS 1021
Primary care and surgical clinic with a staff of three phy-sicians
“the record reflects that the BCC clinic had significant com-mercial goodwill, due to its name, location, extended hours, client base, and ‘walk-in’ practice, all of which could poten-tially carry over to any new owner.”
Rice v. Angell, 73 Tex. 350
Insurance agency partnership (50/50)
“We can understand very well how a good will may become a thing of value to a mercantile establishment. As attending a fixed place of business and a name indicating the contin-uousness at least in part of the same proprietorship and management it may draw to it a custom which is in itself a source of profit.”
Taormina v. Culic-chia, 355 S.W.2d 569
Canning business
Cites the following as evidence of commercial goodwill: “the partnership…had occupied the same premises since 1944.”
Welder v. Green, 985 S.W.2d 170
Accounting firm partnership
“Green did remain in the old location – a building he co-owned with former partner, Millikin – and that may have value. However, Welder provided no evidence of clients who remained with Green, or of their value, based solely on Green’s continued use of the old location.”
Business reputa-tion
Finn v. Finn, 658 S.W.2d 735
Large law firm part-nership (Thompson & Knight)
Finds evidence of commercial goodwill because “a large part of the firm’s reputation for providing services was built upon the professional abilities of the husband’s predecessors as well as on those of the other employees”
Factor
Case
Type of Business
Excerpt
Commercial Goodwill Factors (continued)
Established em-ployees/workforce
Geesbreght v. Geesbreght, 570 S.W.2d 427
Prof. corp. providing ER physician ser-vices at hospitals
Notes the “ten full-time, and 50 to 100 part-time physi-cians with whom Emergency Medicine has employment contracts”
Finn v. Finn, 658 S.W.2d 735
Large law firm part-nership (Thompson & Knight)
Finds evidence of commercial goodwill because “the law firm consisted of twenty senior partners, twenty-two junior partners and forty-three associates”
Rathmell v. Morri-son, 732 S.W.2d 6
Independent insur-ance agency corpo-rations
Finds evidence of commercial goodwill because “the com-pany had several competent key employees who handled the day-to-day needs of clients” and because of testimony that the companies “were not a ‘one-man show’”
Finch v. Finch, 825 S.W.2d 218
Car shop
Finds commercial goodwill because appellant “employed some men to work on cars at his shop” and “persons other than appellant performed some of the work at the shop and fostered the good will toward the customers”
R.V.K. v. L.L.K., 103 S.W.3d 612
Group radiology medical practice
Dissent cites the fact that the business “employs thirty-nine physicians…and fifty-five non- physicians” in making the point that it was clear the businesses had commercial good-will
Hill v. Hill, No. 02-12-00332-CV, 2014 Tex. App. LEXIS 292
Partnership interest in Big Four account-ing firm (KPMG)
Cites testimony that the firm had “1,900 partners and prin-cipals” as evidence similar to Finn, where commercial good-will was found
Contracts with customers in name of business
Geesbreght v. Geesbreght, 570 S.W.2d 427
Prof. corp. providing ER physician ser-vices at hospitals
“in the event John sold his stock to another physician…there would be an opportunity to retain the contracts”
Eikenhorst v. Eik-enhorst, 746 S.W.2d 882
Two 50/50 radiologi-cal partnerships
Cites the fact that “the partnerships themselves had the contracts with the local hospitals, not the individual part-ners” as part of the evidence that was sufficient to support the trial court’s finding of commercial goodwill
Many customers
Eikenhorst v. Eik-enhorst, 746 S.W.2d 882
Two 50/50 radiologi-cal partnerships
Cites “the present monopoly these partnerships have in providing radiological services to the local community” as part of the evidence that was sufficient to support the trial court’s finding of commercial goodwill
Nowzaradan v. Nowzaradan, No. 01-05-00094-CV, 2007 Tex. App. LEXIS 1021
Primary care and surgical clinic with a staff of three physi-cians
“the record reflects that the BCC clinic had significant com-mercial goodwill, due to its name, location, extended hours, client base, and ‘walk-in’ practice, all of which could poten-tially carry over to any new owner.”
Revenues gener-ated separate from individual’s efforts
Geesbreght v. Geesbreght, 570 S.W.2d 427
Prof. corp. providing ER physician ser-vices at hospitals
“Little, if any, of the hospital emergency room services at locations other than Harris was ever personally performed by John”
Finch v. Finch, 825 S.W.2d 218
Car shop
Finds commercial goodwill because “persons other than appellant performed some of the work at the shop and fostered the good will toward the customers”
Nowzaradan v. Nowzaradan, No. 01-05-00094-CV, 2007 Tex. App. LEXIS 1021
Primary care and surgical clinic with a staff of three physi-cians
“the record reflects that the BCC clinic had significant com-mercial goodwill, due to its name, location, extended hours, client base, and ‘walk-in’ practice, all of which could poten-tially carry over to any new owner.”
Established his-tory
Finn v. Finn, 658 S.W.2d 735
Large law firm part-nership (Thompson & Knight)
Finds evidence of commercial goodwill because “the firm has been providing legal services to the public for more than ninety years”
Taormina v. Culic-chia, 355 S.W.2d 569
Canning business
Cites this as evidence of commercial goodwill: “the defend-ants, having obtained a new lease from the corporation, con-tinued in business at the same location, using the same name, and dealing with substantially the same suppliers and customers that the previous partnerships had used and dealt with ever since 1944.”
Competitive prices and services
Rathmell v. Morri-son, 732 S.W.2d 6
Independent insur-ance agency corpo-rations
Cites testimony from the top customer that “the only reason his company would stay with the Rathmell companies was that they offered competitive prices and services”