Valuation of Professional Practice


#1

I am a business valuation consultant in New York. I just read the article by Mr. Rosen that addressed the issues of how to value the professional practice. I am familiar with all the various valuation techniques, but have never dealt with the issue of Personal Goodwill vs the value of the goodwill that is attached to the practice itself (I believe it was refered to as Practice Goodwill). Two questions arise for which I have not been able to obtain a successful answer about. The first is that if Personal Goodwill is considered marital property (which I believe makes sence), when ariving at a value of the practice, an amount that represents reasonable compensation should be deducted from the profits of the firm to arrive at the profits that will be capitalized. The reasonable compensation that is deducted should be the amount that is dealt with when arriving at the child support/alimony amounts. By doing this you have seperated the finances of the parties into property to be divided and income to be divided. If this is correct, it would also appear to be correct to factor into any valuation that uses the market approach to valuation a factor for the compensation to be paid to the selling partner after the assumed valuation takes place. For example, if a market valuation assumes that the selling partner will work for X years, than amount of assumed compensation should be used for the child support/alimony calculations. Conversly, if the market indicator assumes that after the sale the selling partner will not be employed, then the income to be used for the child support/alimony calculations needs to be based upon a reasonable estimate as to what that partner cound make at some other employment, factoring in any non-compete restrictions. One final point, if the partner who is getting divorced is going to retain the practice, and is forced to give other assets or money to the spouse, it would appear equitable that the spouse that is retaining the practice be compensated in some manner for the taxes he will have to pay someday when the practice is sold. For example, assuming a $0 basis in the practice, if the practice is valued at $1,000,000, and the partner is required to give the spouse $500,000 in cash for her 50%, the partner is coming out on the short end because he will have to pay tax on the 50% he obtained when sold. Should an adjustment be made for this tax and deducted from the $500,000 paid to the spouse.
Unfortunately, in my experience the factors mentioned above are not addressed by the attorney’s and valuation professionals.
Thanks for your help, and if you ever have an valuation issue in NY feel free to contact me.