In an all too common scenario in divorce (and other) courts, the opposing experts in Pellom v. Pellom submitted appraisals that were worlds apart. In this case—decided on December 2, 2008 by the North Carolina Court of Appeals—the husband’s expert appraised his 11% interest in an anesthesiology practice at $183,000, while the wife’s expert determined it was worth $1,267,000. The court examined the following factors and competing claims:
- Normalized income. The wife’s expert used $525,000 as the husband’s normalized annual income, based on his historic salary as of the separation date (June 2004). The husband’s expert said he should have included the doctor’s 2004 and 2005 earnings, which had declined.
- Compensation data. The wife’s expert used data from the Medical Group Management Association’s (MGMA) 2003 compensation survey to plot the husband among the 75th percentile of similarly situated anesthesiologists. The husband’s expert said that data from the 2004 MGMA survey were more appropriate, and the survey was available at the valuation date.
- Correct percentile. Based on the number of annual procedures that his practice performed (2,000 per physician), the husband’s expert said that he belonged in the 90th percentile of MGMA doctors, because they performed 1,400 procedures annually, compared to those in the 75th percentile (1,153 per year).
- Goodwill and accounts receivable. The husband’s expert did not account for the practice’s goodwill in his valuation, however. Nor did he value its accounts receivable.
Which expert ‘won’? The trial court adopted the $1.27 million valuation by the wife’s expert without adjustment. It found that the wife’s expert: 1) Used the appropriate income figures, known as of the valuation date; 2) used an acceptable MGMA survey, taking multiple factors into account—including clinical hours worked and retirement benefits; 3) correctly considered that the husband’s practice permitted nurse anesthetists to perform a portion of its 2,000 annual procedures; and 4) correctly valued the practice’s goodwill and accounts receivable. The court of appeals confirmed the trial court’s valuation conclusion in all respects. Look for a complete abstract of the case in the February 2009 Business Valuation Update.
For those interested in insights on healthcare valuation, we’ve just posted a new Free Download at BVResources, “Medical A/R: Top Issues That Impact Your Valuations,” by Mark Dietrich, CPA, ABV, excerpted from our latest industry release, BVR’s Guide to Healthcare Valuation, co-edited by Dietrich and Cindy Eddins Collier. The new Guide covers all the complicated aspects of healthcare valuation, from interpreting regulatory standards to applying compensation and other physician benchmarking data. To find out more about the Guide—including an online view of the table of contents and introduction—click here.
Last but not least, do not miss Collier and others at the 26th annual LEI National CLE Conference in Vail Colorado, January 3- 7, 2009. The business valuation track features Collier on healthcare valuations and case law update, Nancy Fannon on avoiding Daubert challenges; Ron Seigneur on the liquidation premise in valuations and reasonable compensation; Tom Hilton on emerging issues in electronic evidence, and lots more. Many of the BV speakers will be crossing over to address attorney tracks on valuation issues—and networking with the 600+ attendees in one of the most outstanding ski resorts in the world. Act now: conference lodging is available at reduced rates until December 15, 2008.
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