The Challenge
In a divorce, one spouse owned a successful outpatient health care practice. It had a trained staff, an established name, and steady referral relationships. The practice was likely the largest asset in the marital estate, so its value would shape the entire settlement.
The owner-spouse's expert valued the practice using the asset approach: add up the equipment, furniture, and receivables, subtract liabilities, and stop there. The result was a modest number. The expert also concluded that any goodwill belonged entirely to the owner personally, which would leave it outside the marital estate.
Counsel for the other spouse suspected the number was far too low, but needed an independent analysis that could explain why, and that would hold up under cross-examination.
Our Approach
We started by choosing the right method, not just applying every available one. The asset approach suits holding companies and businesses winding down, but it rarely captures the value of an operating business that earns more than its equipment is worth. Here, the income approach fit the facts: the practice had a consistent earnings history and a clear capacity to keep producing them.
Next, we normalized the earnings. Using the general ledger rather than summary financial statements, we identified adjustments a buyer would make:
- Owner compensation was compared with what a market-rate replacement would earn for the same role.
- Personal expenses run through the practice, such as a vehicle, were removed.
- A lease with a related party was adjusted to market rent.
Finally, we addressed goodwill directly. Many states, including Pennsylvania, treat enterprise goodwill (value that stays with the business) as marital property and personal goodwill (value tied to one individual's skill and reputation) as separate. We tested the practice against factors that show which kind of goodwill is present:
- Could the practice run without the owner seeing every patient?
- Did the staff deliver much of the care?
- Would referral relationships stay with the practice if the owner left?
- Did the practice's name carry recognition on its own?
The Findings
- The method drove the difference. The asset approach ignored the earnings the practice reliably generated. The income approach, applied to normalized earnings, produced a value roughly four times higher.
- Normalization added real earnings back. Owner pay above market rate, personal expenses, and the above-market related-party rent had all made the practice look less profitable than it was.
- Much of the goodwill belonged to the business. A trained staff, transferable referral relationships, and a recognized name meant that a meaningful share of the goodwill was enterprise goodwill, not personal.
The Outcome
With a documented explanation from a forensic accountant for divorce of where the two valuations parted ways, counsel could challenge the opposing expert's choices one by one: the method, the missing normalization adjustments, and the "all personal goodwill" conclusion. The parties settled at a value well above the opposing expert's figure, reflecting the practice's real earning power.
Key Takeaway
In divorce, business valuation services are only as good as the choices behind them. Two experts can look at the same practice and land far apart, and the gap usually comes down to method, how the owner's pay is treated, and how goodwill is divided. A forensic accounting expert witness who explains those choices clearly gives counsel the tools to test the other side's number.
When you depose an opposing valuation expert, ask: Why this approach and not the income approach? How did you set reasonable owner compensation? How did you separate enterprise goodwill from personal goodwill, and based on what facts?