When determining the value of professional services businesses – such as law firms, medical practices or accounting, engineering or consulting operations – it is important, according to a noted Philadelphia forensic accountant and Certified Valuation Analyst, to consider the personal goodwill associated with the professional or business owner.
David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, explains that the Internal Revenue Service defines goodwill as “the value of a trade or business based on expected continued customer patronage due to its name, reputation, or any other factor.” Recent court decisions, Anderson explained, have recognized a distinction between the goodwill of a business itself and the goodwill attributable to the owners/professionals of that business. This second type is typically referred to as personal goodwill.
Personal goodwill differs from overall business goodwill in that personal goodwill represents the value stemming from an individual’s personal service to that business, and is an asset owned by the individual, not the business itself, said Anderson, a forensic accounting expert in Philadelphia with experience conducting business valuation services in the Delaware Valley This value would encompass an individual’s professional reputation, personal relationships with customers or suppliers, technical expertise, or other distinctly personal abilities which provide economic benefit to a business. Anderson said this economic benefit is in excess of any normal return earned by the company.
An example of this can be seen from one of Certified Valuation Analyst Anderson’s past cases. This situation involved the divorce of a specialist physician who had a reputation as being one of the top doctors in his field on the East Coast. As a result, he was sought out by patients up and down the East Coast – a far greater geographic area than most of the practice served. Because of the larger than normal number of patients that visited the practice to see him and because he performed more expensive and complex procedures than most of the other doctors in his practice, he generated considerably more income for the practice than any of the other doctors.
In order to calculate the personal goodwill of this physician, Anderson – principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley – obtained compensation and productivity data for the “typical” physician in his specialty with the same level of education and experience. He compared this to the husband’s actual earnings and productivity.
Anderson then capitalized the stream of income arising from differences in revenue generated minus the differences in compensation. This capitalized amount was the personal goodwill associated with the husband. He subtracted the personal goodwill from the value of the practice in order to determine the business value of the practice. It was this value that was used in the marital dissolution proceeding. In this case, the personal goodwill of the physician represented almost half of the value of the entire practice.
In another case, involving a physician who did not possess such a significant reputation or expertise, Anderson calculated the amount for personal goodwill was less than 5 percent of the value of the entire practice.
If you require the services of a Certified Valuation Analyst in Philadelphia or any other forensic accounting services in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.
About David Anderson & Associates
David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services. Company principal David Anderson is a forensic accounting expert in Philadelphia who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Valuation Analyst and a Certified Fraud Examiner in Philadelphia.
