Patient records are ‘professional goodwill,’ despite non-compete

BVWireIssue #96-4
October 29, 2010

Remember our recent report on McReath v. McReath (BVWire # 96-2), in which we said the Wisconsin Court of Appeals may have just revised the majority rule on the disposition of private practice goodwill to say that all salable goodwill is a marital asset, subject to division, whether corporate or professional. Further, a non-competition agreement can serve as proof that at least some portion of professional goodwill is saleable, according to McReath. Now we have McKee v. McKee—which also valued a dental practice, in this case the owning wife’s 33% interest. The wife’s expert valued her interest at only $97,000, essentially ignoring the buy-in price of her two partners (one as recently as 2005, for $749,000). In a buy-sell transaction, the wife’s expert explained, the value of goodwill is allocated into “identifiable and unidentifiable goodwill,” but in a divorce, under the applicable majority rule, “the distinction is between personal . . . and business goodwill.” Patient records fell into the former category, he said; in fact, a non-compete in this case “proved” the existence of professional goodwill—and the court agreed, adopting his $97,000 value because “if the wife’s one-third interest was sold, the only assets which would be marketable would be the equipment and accounts receivable.” The Tennessee Court of Appeals affirmed, finding the valuation complied with the majority rule. Query: Under McReath, would the patient records constitute salable professional goodwill, as evidenced by a prospective buyer’s likely demand for a non-compete? Moreover, what if the wife retired the day after divorce: Would a sale of her interest likely garner more than $97,000, thus demonstrating the inequities (discussed by McCreath) that could result from excluding salable professional goodwill from the value of a professional firm? Have these cases served to confuse or clarify the issue? Send your comments to BVWire’s legal editor, and look for a broader discussion in BVR’s Guide to Personal v. Enterprise Goodwill, the 2011 edition coming soon. And by the way, the digests of McCreath and McKee are in the current (Oct. 2010) Business Valuation Update™. Copies of both court opinions are now available at BVLaw™.
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