A Theoretical Analysis of Professional Partnership Goodwill

The existence and ownership of the goodwill of professional partnerships\u27 is one of the most muddled subjects in partnership law. This article concludes that the accounting concept of goodwill does not help identify the rights of withdrawing partners or partners\u27 spouses in professional partnerships. The central problem is the difficulty of separating what is owned by such firms from the human capital owned by the partners individually. The article substitutes for the accounting approach a theoretical analysis of the partners\u27 rights that views the rights of withdrawing partners in terms of optimal default compensation rules. It leads to the conclusion that withdrawing partners should not have a default property right in expected cash flows of the firm analogous to what has been characterized as goodwill. On the other hand, broader rights of partners\u27 divorced spouses may be justified by considerations applicable specifically to the divorce setting. Part I of this article describes and explains the conventional accounting concept of goodwill. It shows that this concept contributes little to a determination of rights in professional partnerships because partnership goodwill is impossible to value in this context. Moreover, Part II shows how both the partner withdrawal and divorce cases have departed significantly and in different ways from the conventional meaning of goodwill. The remainder of the article applies economic analysis to issues regarding the goodwill of professional partnerships. Part III analyzes the property rights of withdrawing partners, while Part IV articulates the different considerations that apply to the rights of partners\u27 spouses in marital dissolutions