Are you a doctor, dentist, attorney, accountant, architect, engineer, consultant or other professional? If so, are you a sole proprietor or a member of a group practice or firm, perhaps formed as a partnership or corporation? If the former, as a sole proprietor you may wish to know the value of your practice, if any, for purposes of a sale on your death, disability, retirement or other transition. If the latter, your partnership agreement or a separate buy-out agreement may provide for a purchase of your interest in the firm and may set a value or formula for determining the value or price of your interest should you die, become disabled, retire or leave the firm.
With most businesses the value of the company or of an interest in the company depends primarily on the profits of the business. There may be a value for the furniture, fixtures and equipment (perhaps represented by book value or appraised value) and a value for the “goodwill,” if any, of the business. Goodwill is often based on a multiple of projected future earnings. The trick is in determining how to project future earnings. That might be straightforward for a company whose goodwill is based largely on the history and reputation of its business. However, valuing an interest in a professional practice is often more difficult.
To a significant degree, the success of a professional firm is reliant on the skill, reputation and relationships of the individual members of the firm. Thus, it is often said that “the value of the firm, and thus of individual interests in the firm, walks out the door every night.” If that is true, what, if anything, is the value of an individual member’s interest to a prospective buyer or to the other members of his or her practice group or firm? If patients or clients of the firm leave the practice group or firm when “their” doctor, dentist, lawyer, accountant, etc. leaves or dies, the value of his or her interest to a buyer might be close to zero. While a portion of a professional’s patients or clients will likely stay with the practice or firm, predicting that portion may be difficult, and even those who initially stay may move on later. For large practice groups or firms to which the clients or patients are attracted by the reputation of the group or firm more than any particular professional, an individual member’s interest may have “goodwill” value beyond the value of a percentage interest in the furniture, fixtures and equipment. For other firms most or all of the goodwill associated with a professional may in fact walk out the door when he or she dies, retires or leaves.
Professionals who successfully address valuation issues can take a realistic approach to planning for death, retirement and other ownership transitions. These transitions can be anticipated and formulas for valuation can be included in partnership agreements, buy-out agreements or sale documents. A consultant experienced in professional firm valuations can be helpful in determining a fair value for an interest in a practice group or professional firm.
In addition to price, there are a number of other issues to be considered in preparing for transitions in ownership and in structuring buy-out agreements, entity documents and sale documents. Please contact us if we can assist you in any of these matters.