Divorce/Partnership Disputes and Goodwill Allocations
Evaluators should be experienced in representing dentists in valuation-related litigation.
A valuation is a necessary tool to be used to support the position taken by the parties in a dispute. Because valuations are considered appraisals similar in nature to the appraisal of a home, there is some flexibility in the methodology used in the preparation and with the formulas used to come to a conclusion of value.
The importance of the credentials of the evaluator becomes paramount when the valuation report has been completed and the evaluator’s testimony is ready for court. It is important to carefully read the experts’ resumés before scheduling a conference.
Is the Expert Experienced?
Has the expert testified before in court and if so, how many times has the expert testified during a divorce or partnership dispute hearing involving a dentist? If the answer is never or once or twice, it should raise a flag disqualifying that evaluator from being retained. Choosing someone with expertise in representing dentists is critically important when deciding who to retain for this service.
Is the Expert Published?
It is not enough for the expert to have published in professional dental journals, which is a credential favored by the courts. The person or firm retained should have written articles regarding litigation. Additional articles should have been written about goodwill, as the allocation between the amount attributed to the enterprise, or dental practice, and that amount allocated to the dentist as his or her personal goodwill is of paramount importance to a judge and jury when it is time for a decision about how to award damages.
What Methodology Determines the Value of the Practice?
Advisors with expertise in representing dentists primarily use a capitalization of earnings, gross revenue, and multiple of earnings combination to determine the value of a dental practice. Certain discretionary items are added back to earnings to arrive at a more representative amount than those earnings reported on tax returns.
However, pivotal to this equation is the methodology used by the expert in determining the amount attributed to the dental practice goodwill as a percentage of the total value. Are there standards that can be used in court to justify the expert’s determination? Because goodwill historically represents the major portion of the value of a dental practice, the support for its determination can mean the difference of hundreds of thousands of dollars to the party prevailing in court.
Once the valuation has been completed, the more difficult part of the exercise must take place. That is the allocation of goodwill between the enterprise, or dental practice, and the dentist’s personal goodwill.
Goodwill is exceedingly important because it typically represents up to 80% of the entire value of the dental practice. With that allocation, the amount attributed to the dentist personally, compared to the enterprise or dental practice, is critical in terms of present and future financial considerations for the winner and loser of the dispute. Whether it is a divorce, partnership dispute, or even a government tax audit, the guidelines for allocating goodwill are similar for each.
Personal Goodwill
Personal goodwill is the value of the earnings or cash flow directly attributable to the individual practitioner’s characteristics or attributes, and is a function of the earnings of repeat business that will patronize the individual practitioner compared to the dental practice itself.
Personal goodwill attributes include the lack of transferability of patients from the practice; the ability, skills, and judgment of the individual dentist; a personalized business name; referrals to the individual dentist, rather than the staff in general; the recognition of the personal reputation of the individual dentist, the staff, and who they actually work for; the age, health, and work habits of the individual dentist; whether the advertising and marketing is primarily for the dental practice as a whole or the individual dentist; and the website appeal and who is highlighted on it.
Enterprise or Institutional Goodwill
Enterprise or institutional goodwill is the value of earnings or cash flow directly attributed to the characteristics or attributes of the enterprise, and not to any one individual. Enterprise, or practice, goodwill is a function of earnings from repeat business (patients) that seek out the office staff or other professionals employed by the dental practice and new referrals that will be made to the office because of it and not the individual practitioner. The existence of enterprise goodwill is based on the fact that people come to the enterprise with no regard as to whom they may see for the professional services.
The ultimate test of the goodwill value for a dental practice will depend on whether the goodwill value is transferrable to a buyer of a practice. Does the dentist have non-competition and solicitation agreements? Is there a practice specialty? What is the practice profitability as determined by compensation and benefits to the “owner” dentist from the dental practice?
Conclusion
Given that the weight assigned to each attribute is the final determinant of the percentage or dollar value that assists a court in awarding the goodwill to the winner of the dispute, the skill of the evaluator may contribute greatly to the final award.
About the Author
Bruce Bryen, CPA | Mr. Bryen is the Managing Partner in the firm of Bryen & Bryen, LLP, Certified Public Accountants, in Marlton, New Jersey. He is experienced in providing litigation support services and has testified on numerous occasions as an expert witness. He can be reached at 856-985-8550, ext. 112, or visiting www.bryen-bryenllp.com.
