As with all businesses in a divorce case, a professional practice must be valued for equitable distribution purposes. Valuations of professional practices (lawyers, doctors, dentists, etc.) differ somewhat from the valuation of other businesses. The value of these types of practices must include the value of goodwill (reputation that will generate future business), which is difficult to value.
Goodwill includes a whole host of intangible factors, including the quality of management, the ability of the practice to produce and market efficiently, and the existence and nature of competition.
In order to value goodwill, the evaluator (generally a forensic accountant) must establish baseline earnings for a person in said profession and compare them to the true earnings of that particular practice. The expert must distinguish between the part of compensation which is salary and that which is a distribution of profits.
It has been held that the monetary worth of a professional practice is the sum of the following:
- Value of the partner’s capital account;
- Accounts receivable;
- Value of work in progress;
- Any appreciation in the true worth of tangible personalty over and above book value; and
- Goodwill.
Once the above is established, that number should be reduced by accounts payable and liabilities not reflected on the books.
Goodwill needs to be valued with great care since the individual practitioner will have to pay his/her soon to be ex-spouse a tangible dollar amount based on an intangible asset (goodwill) at a value based on some uncertain elements.