Valuation of “Goodwill” In Professional Practices

Professional practices include ownership interests of doctors, dentists, veterinarians, lawyers, pharmacists, physical therapists, accountants and chiropractors. Goodwill may exist for a professional person even though the goodwill is personal to the professional and is not readily marketable. In the Washington Supreme Court case of Marriage of Fleege, the court set forth the appropriate factors for the courts to consider when setting the value of professional goodwill in a divorce. The determination of the value of a professional practice can be reached by consideration of such factors as the practitioner’s age, health, past earning power, reputation in the community for judgment, skill, and knowledge, and his comparative professional success.

However, professionals must have an ownership interest in their practice in order for their to be potential goodwill value. Employee (salaried) professionals have no goodwill value. It is critical to make a determination of ownership.

Because these factors are very general in nature, a wide discrepancy in valuation may be presented (often by hundreds of thousands of dollars) and the evaluating accountant is given the ability make a personal judgment in arriving at a determination of value. The success in setting an appropriate value depends in large part on the skill of the attorney representing either the practitioner or their spouse and upon the use of skilled expert witnesses. These expert witnesses are traditionally CPAs trained and certified in business valuations. These CPAs should have extensive experience in prior court testimony as well. Inquire of both your prospective attorney and CPA of their trial experience in such cases and of the results obtained by them.

Crouse Erickson