Experts clash over definition of ‘net worth’ in New Jersey buyout dispute

BVWireIssue #196-1
January 9, 2019

judicial dissolution, buy/sell agreement
goodwill, intangible assets, liability, book value, accounts receivable, net worth

Business partners often think that a buyout agreement will forestall future conflicts. A recent New Jersey case proves the opposite. Not only did the agreement not prevent litigation, but it also did not bring about a fair outcome. The court recognized as much when it said the language in the agreement and the lack of any updated valuations gave it little discretion when determining the buyout price. Valuators can use this case to remind clients of how important it is to periodically review any existing buyout agreement and obtain current valuations.

Flash point—intangible assets: The case arose after a founding member of a pediatric practice decided to retire after 38 years of practicing medicine. He had a 25% interest in the practice. Under an operating agreement, the members were bound by a valuation from 2000 because they had failed to agree to an updated valuation that accorded with the buyout provisions. In 2017, the retiring member sued. Ultimately, the court decided the agreement required a calculation of the company’s value using the last agreed upon company value, $2.4 million, “adjusted to reflect the increase or decrease in the net worth of the company, including collectible accounts receivable since the last agreed upon value.”

The plaintiff’s expert proposed that “net worth” here included the value “beyond the net tangible assets on the books at that time [2000]. This intangible value, although unrecorded, is an asset of the company that would be considered goodwill.” He developed a metric for calculating the value of the company’s intangible assets in 2016. He concluded the company’s value in 2016 ranged between $5.6 million and $6.75 million.

According to the defense expert, “net worth” was “the total amount of all assets minus all liabilities, as stated in the balance sheet.” Under GAAP, he said, intangible assets such as goodwill are “not recorded on the balance sheet of an entity unless it is the product of an acquisition or some type of business combination.” And, even in an acquisition, the inclusion of intangible assets on a balance sheet is the exception, not the rule, he noted. Adjusting the company balance sheets by including the value of collectible accounts receivable and excluding an amount that represented goodwill, he arrived at a range of value between $2.8 million and $3.2 million.

The court credited the valuation of the defense expert. Including intangible assets in the net value calculation was improper, the court said. It also said the plaintiff expert used a definition that allowed him “to manipulate the Company Value calculation for the benefit of the Plaintiff.”

But the court also was “mindful” that the plaintiff might feel “shortchanged” by the outcome. Therefore, it said it would use its limited discretion to adopt the higher amount in the defense expert’s value range as the company’s value in 2016.

A digest of Namerow v. PediatriCare Associates, LLC, 2018 N.J. Super Unpub. LEXIS 2633 (Nov. 29, 2018), and the court’s opinion will be available soon at BVLaw.

Please let us know if you have any comments about this article or enhancements you would like to see.