In most states, divorce courts split business goodwill into two piles: enterprise goodwill, which belongs to the business and gets divided, and personal goodwill, which belongs to the individual and doesn’t. Shannon Pratt’s The Lawyer’s Business Valuation Handbook keeps a count. As of the 2024 edition, 30 states and the District of Columbia exclude personal goodwill from the marital estate. If you learned the law in one of those states, or you’re a valuation professional trained on that framework, Washington will surprise you.
Washington divides personal goodwill. Pratt’s state-by-state chart puts it plainly: “No distinction; personal and enterprise goodwill are marital,” citing In re Marriage of Hall, 103 Wn.2d 236, 692 P.2d 175 (1984). Washington sits in a shrinking group of about 13 states that divide both kinds, alongside California, Arizona, and New York.
The rule is old and stable here. Professional goodwill has been divisible property since In re Marriage of Lukens, 16 Wn. App. 481, 558 P.2d 279 (1976). That’s true even when the goodwill is “personal to the professional and not readily marketable.” The Supreme Court confirmed it in In re Marriage of Fleege, 91 Wn.2d 324, 588 P.2d 1136 (1979), a dental practice case. The holding defines Washington’s whole approach: the question is not whether the goodwill could be sold. It’s whether the goodwill has value to the practitioner who keeps it. Other states have looked at that reasoning and rejected it by name. A Hawaii appellate court quoted Fleege and declared, “We disagree.” That disagreement is the national fault line, and Washington is firmly on the value-to-the-holder side of it.
So the questions in a Washington divorce are not “is this goodwill enterprise or personal?” They are whether goodwill exists, and what it’s worth.
What goodwill means here
Washington defines goodwill as the expectation of continued public patronage: the monetary value of a reputation. As Division Two put it, goodwill “is a way of recognizing earnings not strictly attributable to the value of the work performed” and “is distinguishable from the skill, education, and earning capacity of a practicing professional.” Dixon v. Crawford, McGilliard, Peterson & Yelish, 163 Wn. App. 912, 262 P.3d 108 (2011). Goodwill survives things you might not expect. A practice’s goodwill can continue to exist after the professional retires or the business closes. It lives on in the patients, referrals, trade name, and location that attach to successors. And it is inseparable from the business; it can’t be valued and awarded as a freestanding asset apart from the company it belongs to.
The valuation treatise writers draw the enterprise/personal line by asking what generates the expectancy of repeat patronage. Written customer contracts, employment and noncompete agreements with key employees, formalized systems, brand recognition, and an advantageous location point toward enterprise goodwill. A business dependent on the owner’s personal skills, relationships, and reputation, with no noncompetes and no contracts, points toward personal goodwill. One reported example: a medical practice with 60 doctors under employment agreements came out 70 percent enterprise, 30 percent personal. A niche insurance agency with no contracts at all was found almost entirely personal. In a carve-out state, that allocation is the whole case. In Washington, it mostly isn’t, because both piles are divisible.
The one real exclusion: no business, no goodwill
Washington draws its line somewhere different. A salaried professional has no goodwill, because there’s no business for goodwill to attach to. In Hall, the court considered goodwill for a physician in private practice but not for one employed by a medical school. The same person, with the same reputation, has divisible goodwill as an owner and none as an employee.
Anyone who thinks that line is tidy should sit with it for a minute. Future earning capacity is not property. The expectation of continued public patronage is. The Family Law Deskbook’s authors concede the boundary can be “so fine as to be rendered invisible in certain cases.” The distinction is real, though. Goodwill is valued from past results, not from the professional’s expected future labor. Future earning capacity is a factor in dividing property but never an asset itself.
How Washington values goodwill
Hall approved five methods without making any mandatory: straight capitalization of earnings, capitalization of excess earnings, the IRS variation of excess earnings, market value based on comparable sales, and the formula in a buy-sell agreement. Courts may use one, several, or a hybrid, together with the factors from Fleege: the practitioner’s age, health, past earning power, reputation for judgment, skill, and knowledge, and comparative professional success. Those factors matter in practice: appraisers use them in setting the capitalization rate.
The excess earnings method
The workhorse is the excess earnings method, and it’s worth knowing its pedigree. It descends from a 1920 U.S. Treasury memorandum created to value the goodwill breweries lost to Prohibition, restated in 1968 as Revenue Ruling 68-609, which itself calls the approach a method of last resort. Pratt’s handbook calls it “one of the most widely used and abused of all business valuation methods” and notes it remains especially popular in divorce work.
Two review points do most of the quality control. Was a reasonable owner’s salary deducted before anything was capitalized? And is the capitalization rate supported by anything beyond the IRS’s 1968 illustration rates of 15 to 20 percent? One useful translation: the rate’s reciprocal is how many years of excess earnings a buyer would pay up front. A 25 percent rate means four years. Ask whether that’s plausible for this practice.
Two practice points inside the framework. First, the buy-sell agreement is a factor, not a ceiling. A shareholder agreement transferring stock at book value with nothing for goodwill does not bind the dissolution court. In re Marriage of Brooks, 51 Wn. App. 882, 756 P.2d 161 (1988) (goodwill of a law practice valued at $93,115 by excess earnings despite zero-goodwill bylaws). Second, the court must value goodwill using at least one accepted method and must state its method on the record. That gives counsel a concrete target on appeal when a court shortcuts the analysis.
Where goodwill comes out to zero
Divisible doesn’t mean inevitable. Washington courts have affirmed zero goodwill findings in two recurring situations:
No excess earnings. A professional who earns no more than similarly situated peers has nothing above replacement compensation to capitalize. In re Marriage of Luckey, 73 Wn. App. 201, 868 P.2d 189 (1994).
The earnings reflect effort, not reputation. In re Marriage of Zeigler, 69 Wn. App. 602, 849 P.2d 695 (1993), involved the most profitable State Farm agency in the state. The court found no goodwill, partly because the owner worked 60 hour weeks for years. Reasonable compensation for that effort absorbed the earnings. The case also holds a captive agency’s goodwill may be indistinguishable from the principal company’s. A termination value may still be divisible.
What these cases have in common is that goodwill in Washington rises and falls with excess earnings. Where reasonable replacement compensation explains the whole income stream, there’s nothing left for goodwill. That makes the replacement salary assumption, not the enterprise/personal label, the issue that actually decides a Washington goodwill case.
Four wrinkles worth knowing
A practice brought into the marriage. Goodwill existing at the wedding can be apportioned between separate and community property. The theory is that goodwill is a wasting asset replenished by work during the marriage. In re Marriage of Sedlock, 69 Wn. App. 484, 849 P.2d 1243 (1993). Sedlock declined to prescribe a required apportionment method, so the quality of the expert work drives the outcome.
Entity goodwill in professional firms. Division Three has recognized that a professional entity like a PLLC can hold goodwill independent of its individual owners. Some clients patronize the organization rather than any one professional. The same case holds that discontinuing a business does not destroy its goodwill. McLelland v. Paxton, 11 Wn. App. 2d 181, 453 P.3d 1 (2019).
Noncompete value is different. When a practice sells, part of the price often pays for the seller’s covenant not to compete. That piece is the practitioner’s separate property, not divisible goodwill, because it buys restrictions on that person’s future conduct. In re Marriage of Monaghan, 78 Wn. App. 918, 899 P.2d 841 (1995). Valuation professionals treat a noncompete as an indicium of personal goodwill, and buyers demand them in nearly every real transaction. How a sale allocates price between goodwill and the covenant carries real money consequences in a divorce.
Clients say the worst possible sentence. The Community Property Deskbook warns lawyers that owners often insist “without me there is no goodwill.” In Washington that instinct is exactly backwards. Goodwill being personal to you is not a defense, because Fleege values it to you, not to a hypothetical buyer. Owners should understand that before they give a deposition.
Why this matters at the settlement table
Goodwill is usually the swing value in a professional practice or service business divorce. A valuation built on majority-state assumptions, one that carves out personal goodwill and excludes it, understates the divisible estate under Washington law. A valuation that capitalizes everything without testing replacement compensation overstates it. Read the report’s goodwill section against Hall, Fleege, and the zero goodwill cases. Few exercises in the case are worth more. It’s also where the double dip question begins. Goodwill built on earnings and maintenance paid from earnings have to be reconciled.
Common questions
Is goodwill really property if it can’t be sold? In Washington, yes. Since Fleege, salability is not the test; value to the practitioner is.
Does a solo professional automatically have goodwill? No. The court must find excess earnings above reasonable compensation. Solo practices have been valued with substantial goodwill and with none, on their facts.
Who decides how much goodwill exists? The trial court, as a question of fact, using at least one accepted valuation method, and it must explain its method on the record.
This post is part of our series on divorce involving a family business. Read the main guide, Divorce Involving a Family Business in Washington, or how to read a business valuation report.
Last updated August 2026.
Law Offices of Daniel Ehrlich, Everett. Family law in Snohomish, Island, King, and Skagit Counties. (425) 954-5578.
This article is general information, not legal advice. Every case is different. If you’re facing a divorce involving a business or professional practice, talk to an attorney.
