Family Law – valuing an interest in a professional practice

Valuing a partnership interest – transferability

Corbon & Klousner (2015)

The matter included valuing a partnership interest. The husband worked in and held an interest in a professional practice partnership.

The husband’s experts held that the practice had no goodwill value. The partnership interest was valued at $87,585, based on the husband’s capital and current account at the valuation.

The wife’s expert valued the interest at $1.3m, which was subsequently amended to $773,000. The value was based on the net present value of super profits in the partnership.

Key areas of disagreement

In using the super profit methodology, the wife’s expert made the following assumptions:

• The husband would continue working at the practice in the foreseeable future
• The profit distribution will increase by 5% per year until retirement
• Reasonable salary will increase by 3% per year
• Adopted a reasonable salary of $300,000.
• Used a discount rate of 15%

Counsel for the wife relied to some extend on the case of Scott & Scott where the Court adopted a “value to owner” valuation.

The husband’s experts disagreed on key areas, including that:

• The unit holding related to performance and did not automatically increase on an annual basis
• The growth in profits was not guaranteed
• Per the partnership agreement, no goodwill was recognised on the admission and exit of equity partner.
• Per the partnership, the interest was not transferable
• There was no certainty that the husband would receive profits equal to or above what a partner would earn in the market place
• There was no certainty that the husband would continue in his role a partner until his retirement

The husband’s experts concluded that there were no super profits over and above commercial salary for the position.

If the Court determined that the super profits method was appropriate, then the husband’s expert disagreed with the wife’s expert on certain inputs: that a salary of $400,000 was more likely and that given the high risk of the earnings, a discount rate of 35% was appropriate.

Conclusion

The Judge agreed with the Husband’s experts and adopted the value of $87,585. The Judge stated that the Scott & Scott case involved the valuation of a husband’s interest in a country medical practice. In this cases the husband’s interest is non-transferable, has no goodwill and contains significant risk.

Corbon & Klousener (2015) FamCA 842

Scott & Scott (2006) FamCA 1379

Related reading

• Goodwill valuation
• Valuing Equity

About the Author

Simon specialises in providing forensic accounting and valuation services. Prior to founding Lotus Amity, he was a Forensic Accounting partner with BDO Australia and led their National Forensics practice. He has worked as a forensic director for a major offshore forensic accounting practice which included assisting in multi-billion-dollar litigation in relation to the largest Bernie Madoff feeder fund. He has also held senior management positions with Deloitte and Crowe Horwath. Simon is a Chartered Accountant, CA Accredited Business Valuer and a Certified Fraud Examiner.