In Gaskill v. Robbins (Feb. 19, 2009), the wife was a well-established oral surgeon in Bowling Green, Kentucky, with her own solo practice and staff. At her divorce trial, the wife’s CPA compiled a “detailed” report using an asset-based approach that valued the practice at just over $220,000. The husband’s expert used the same data in applying four different approaches (capitalized and excess earnings, adjusted balance sheet, and market). Finding all reliable but none determinative, he averaged the four values to assess the practice at nearly $670,000, which assumed goodwill as well as a non-compete. The trial court adopted this value and the wife appealed. The Kentucky Court of Appeals sought a discretionary review by the Kentucky Supreme Court, which noted the contention that has surrounded the question “for many years.”
The top Kentucky court conducted a thorough analysis—including 5 key questions that a willing buyer would ask in arriving at a fair market price for a professional practice (e.g., what can be earned from this business over a reasonable time? What is the value of the personnel who will remain?) It also referenced two leading decisions that helped establish the now-majority rule, May v. May, (W.Va. 2003) and Yoon v. Yoon, (Ind. 1999.) After noting their “compelling” reasoning, the court held that the “distinction between enterprise and personal goodwill has a rational basis that accepts the reality of specific business situations.”
A note on non-competes. The court also (gently) chastised the trial court for accepting a valuation that was based simply on averaging four approaches. “Employing all four methods, then averaging them, is tantamount to no method at all,” the court said. In addition, the expert erred in assuming that a “non-existent” non-compete would be part of a hypothetical, fair market value sale. “The fictional sale should be viewed as a ‘fire sale,’” the court said, “meaning that it must be valued in its existing state.” A full write-up of this case will appear in the April Business Valuation Update newsletter—subscribe here.