Liquidation Value and Professional Practices
National Legal Research Group, Inc.)
There is a major split in authority over the valuation of professional practices. Roughly one-half of all states will divide professional goodwill in all cases in which it exists. The remaining states will divide professional goodwill only where it is marketable, and not where it is an unmarketable component of the professional’s personal reputation. See generally Brett R. Turner, Equitable Distribution of Property 6.22 (2d ed. 1994 & Supp. 2002). In all states, however, businesses of all sorts, professional or nonprofessional, are valued as ongoing concerns. The transferable assets of the business, plus any goodwill which constitutes marital property, are given their value as part of an ongoing concern not the lesser sum which could be obtained upon immediate liquidation.
In Sommers v. Sommers, 660 N.W.2d 586 (N.D. 2003), the trial court accepted the husband’s expert’s valuation of his orthodontic practice. The value, which was "based upon the expert’s view there were no probable buyers for the practice," assumed that "contracts in progress would sell for about half their net value," and subtracted "the tax effects of a sale of the assets." Id. at 590. The wife argued that this expert impermissibly used the liquidation value. The North Dakota Supreme Court first agreed that it is error to use the liquidation value unless liquidation is actually imminent:
"While liquidation value, rather than fair market value, may be appropriate under certain circumstances involving distressed conditions," Heggen v. Heggen, 452 N.W.2d 96, 99 (N.D. 1990), "liquidation value is the least favored method of valuing any type of marital property in a divorce," Welder v. Welder, 520 N.W.2d 813, 817 (N.D. 1994). "Ordinarily, fair market value, not ’liquidation value,’ is the proper method of valuing property in a divorce." Heggen, at 99. "Fair market value is the price a buyer is willing to pay and the seller is willing to accept under circumstances that do not amount to coercion." Id.
In Kaiser v. Kaiser, 474 N.W.2d 63, 69 (N.D. 1991), we held that in valuing a company that is not going to be liquidated, "expenses that would only be incurred if the assets were liquidated" should not be deducted. We also said potential taxes should be considered in valuing marital assets in only limited circumstances and theoretical tax liabilities that are not going to be incurred because there is not going to be a liquidation should not be deducted.
Id. The court then found that liquidation was not imminent on the facts:
The trial court asked Dennis: "[H]ave you decided or determined in your own mind when you wanted to leave your practice, in other words, retire?" Dennis responded: "I enjoy what I do very much and my hope is that I can continue to work until I can’t do it anymore, but I can’t maintain the same schedule." Dennis was not contemplating liquidating his orthodontic practice anytime soon. The trial court’s valuation of Dennis’ orthodontic practice at its liquidation value when no evidence indicated liquidation was contemplated or required by the circumstances is clearly erroneous.
Id. The court did not clearly explain why the expert’s value actually assumed liquidation of the practice. From the court’s description of the expert’s methodology, however, two specific problems loom large. First, the expert assumed that contracts in progress would sell for one-half of their value. But if no actual sale was imminent, then contracts in progress would have a much larger value presumably their face amount, less a commercially and historically reasonable discount for uncollectables. Second, if no actual sale was imminent, then the subtraction of tax consequences was wrong, as no actual tax would be incurred.
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