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Unit 11: Valuation of Goodwill

notes
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Case Study cogent valuation – market approach
n a recent valuation assignment involving a large well-known law firm, the law firm’s
partners raised issues concerning each of the three valuation approaches. The market-
Ibased valuation methods provided no indications of value encompassing goodwill;
market pricing information was not available, other than the proprietary database of private
law firm in total transactions, which indicated that the subject law firm had no practice
goodwill. Since pricing information is not readily available for law practices, the partners
of the subject law firm compensation queried the implications, if any, of such information
concerning non-law firm professional practices upon the valuation of the subject law
firm. The utilisation of disparate rules-of-thumb valuation methods for various types of
professional practices implies that the pricing of any particular type of professional practice
cannot be relied upon to value other types of professional practices. Further, dissimilar
from law practices, non-law firm professional practices are commonly sold, and their
sales prices and other relevant information are easily obtained. This observation suggests
that law practices are significantly different from non-law firm professional practices. An
important difference between law firms and non-law firm professional practices is the
inability of the buyer to obtain a covenant-not-to-compete from the seller of a law practice,
which is prohibited by the American Bar Association. Even if one were to attempt, to use
pricing data for non-law firm professional practices, and assuming that that pricing implied
goodwill value related to a given law practice, then one would still have no evidence that
the implied goodwill is attributable to the firm or to the individual attorney(s) in the firm.
When valuing a particular business, we seek pricing information from highly similar
businesses operating in the same industry and having similar risks and value drivers. Non-
law firm professional practices have substantive differences from law firms, precluding
the use of their pricing to value law firms. For example, dental practices rely heavily upon
long-term repeat business, and a new dentist acquiring a practice typically has at least one
opportunity to treat and retain each of the selling dentist’s patients. In addition to fees for
veterinary services, veterinary practices earn substantial revenue from retail sales of various
pet supplies. Not unlike retail businesses, good office locations are critical for optometric
practices, and sub-optimal locations “Just around the corner” from good locations could
devastate an otherwise successful practice. A general medical practitioner does not
accumulate work-in-process or receivables for unbilled time, but conducts and completes
the requisite office visit (often in an hour or less) and bills the patient (or insurer) promptly.
Large, international accounting firms can charge substantially more for their services than
otherwise identical services provided by an independent CPA working in a rural area, yet
the rural CPA may receive compensation in excess of a person of equivalent experience at
the international firm. Typically, law firms do not exhibit the characteristics listed in this
paragraph for other types of professional practices. Thus, the use of the pricing of non-law
firm professional practices for the valuation of law practices is not appropriate.
Questions
1. Analyse the case facts and discuss the problem.

2. Throw light on the approach used in the case.
Source: http://www.cogentvaluation.com/pdf/valuationissueslawpracticesandgoodwill.pdf

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