Professional Practices

Professional practices are typically service businesses that often do not have significant investments intangible assets. As such, income and market approaches are ordinarily used to value professional practices. The typical lack of significant investment in tangible assets often results in value conclusions that are comprised mainly of intangible assets. These intangible assets can include the practice location, telephone number, patient or client charts and files, in-place workforce, and goodwill.

In the divorce context, depending upon the particular jurisdiction, some or all of the value of a professional practice allocated to goodwill is often subject to dispute. Professional practices generally provide specialized services that require the practitioners to possess special levels of knowledge. Because of this, the value of a professional practice is often dependent on the skills, reputation, and efforts of individual professionals. That part of the professional practice value tied to the personal reputation or skill of a professional might not be readily transferable to a buyer. In addition professionals, such as doctors, lawyers and accountants, are generally licensed by a state licensing body. A professional's license is typically not transferable, and in most circumstances, only similarly licensed professionals can buy existing professional practices. Some jurisdictions regard the lack of ready transferability of the personal reputation or skill and the professional license as evidence that these assets have no value in the context of a divorce. In other jurisdictions, the lack of transferability of the personal skill or reputation is offset by the adoption of a standard of value that is more an investment standard of value, in that the practice is viewed from the perspective of its cash flow generating value in the hands of the current owner. In other jurisdictions, either professional licenses or the enhanced earnings power associated with that professional license are deemed to be potential marital assets subject to division. Finally, in some jurisdictions, any professional practice goodwill must be divided into personal or professional goodwill and practice goodwill, with the personal or professional goodwill not being a marital asset but the practice goodwill being included as a marital asset.

Personal or Professional Versus Practice Goodwill

Goodwill is defined as that intangible asset which arises as a result of a well-respected business name, reputation and customer patronage/relations, location, and similar factors that have not been separately identified and/or valued but which generate economic benefits. Personal or professional goodwill is based on earnings that result from the practitioner's individual skills and efforts. Practice goodwill, on the other hand, is based on earnings resulting from the practice's location, capital structure, employees, advertising, reputation (as opposed to the individual's reputation), and other factors. How personal or professional and practice goodwill are treated for valuation purposes in the divorce context will depend on the purpose of the valuation and will vary state by state.

Valuing Personal or Professional Goodwill

When valuing personal or professional goodwill, the factors the valuator should typically take into account include, but are not limited to:

• The age and health of the professional.
• The professional's demonstrated past earnings power (individually and contribution to the overall practice).
• The professional's reputation in the community for judgment, skill, and knowledge.
• The professional's comparative professional success.

Valuing Practice Goodwill

When valuing practice goodwill, the factors the valuator should typically take into account include, but are not limited to:

• Type of service.
• Type of clients.
• Length of time the practice has existed.
• Demographics of current location.
• Length of time at current location.
• Lease term remaining and ability to renew.
• Sources of new clients.
• Individual practitioner's amount of involvement.
• Number of employees and length of service.
• Data on competition from other similar types of professionals.
• Cost of setting up a new practice.
• Amount and type of advertising.
• Capital structure.