There are countless books and articles discussing the differences between personal and practice goodwill and the valuation techniques used in determining the allocation of goodwill in domestic matters. However, a topic that is often glossed over is the due diligence a valuation expert must perform to develop and support the financial analysis and methods/models used in determining the allocation between personal and practice goodwill. The following is a brief overview of the key due diligence elements every valuation expert should know when working on a goodwill case. Ultimately, the evidence derived from this analysis can form the basis for expert opinions and testimony.
Key elements of due diligence are obtained and reviewed to answer the basic question: Why do patients/clients choose this particular practice? Those elements include, but are not limited to, the following:
- Types of patients/clients – i.e., annuity or transactional
- Interview of key staff members and the doctor or professional client/owner
- Interview of key referral sources
- Analysis of website and or brand/practice name
- Analysis of patient/client survey information
- Geographic source for patient/clients
A transactional practice is where the professional is seeing clients for whom they have no prior or preexisting relationship. The professional must constantly replenish the pipeline of clients based on the personal reputation of the professional, thus suggesting a higher percentage of personal goodwill.
Performing an interview with key staff members and the professional/owner along with an analysis of patient or client survey data can help answer the question of “why do patients come to the practice”. This step is often given minimal attention due to the availability of survey data or the difficulty in obtaining interviews of relevant individuals, especially in a litigation engagement. When representing the business-owning spouse, a detailed interview should be performed. When representing the opposing spouse, the expert should always ask Counsel that a written request be made to opposing counsel to allow such interviews and access to the survey information. If that request is denied, preparing detailed questions and attending depositions is the next best option.
Interviewing key referral sources is an often overlooked in the due diligence process in determining the allocation of goodwill. There is a natural hesitancy to allow an expert to talk to your referral sources; however, when performed correctly, there is no negative effect on the practice. The professional or owner can provide a list of names and then contact each referral source in advance asking for their assistance. It has been my experience that this contact has no negative effect on the referral relationship. The expert should prepare a list of questions in advance to ask each referral source. In my view, the information obtained from these interviews can provide powerful evidence when presented in direct testimony to the Tier of Fact.
Geographic data can also provide insight as to why clients are drawn to the particular practice. Clients who come from long distances and bypass other similar or nearby professionals would tend to indicate a higher allocation of personal goodwill.
It is important that the valuation professional carefully assess the elements listed above in supporting the subjective or quantitative analysis used in performing the allocation of goodwill. Quantitative models such as the Multi-attribute Utility Model or MUM relies on the information obtained from the due diligence process to support the model inputs. Obtaining this data from the due diligence process and using it effectively can make the difference in acceptance of the expert’s opinions by the Judge of Jury.
R. Christopher Rosenthal, CPA/ABV/CFF, ASA, AEP is a global leader in the forensic, damages and valuation services profession with more than 30 years of experience. As a director in Ellin & Tucker’s Forensic and Valuation Services Group (FVS), he has been responsible for hundreds of domestic and international consulting engagements throughout the United States as well as Europe, South America and the Middle East. He has testified over 150 times on commercial damages, valuation and forensic accounting issues in federal, state and international courts. For more information, please contact Chris by email at firstname.lastname@example.org.