Opinion ID: 853862
Heading Depth: 2
Heading Rank: 2

Heading: Valuation of Yoon's Practice

Text: Nam offered a valuation of Yoon's medical practice by R. James Alerding and Blue & Company L.L.C. Alerding concluded that the value of Yoon's practice was $2,519,366 of which $2,339,000 was the intangible Value of Dr. Jay M. Yoon on an Intrinsic Value Basis. Alerding testified that the intrinsic value of the practice is the value of a practice to the physician as opposed to the value of the practice as a tradable or market value. Based on this premise, Alerding valued Yoon's practice by giving equal weight to each of three valuation methods, i.e., taking the mean of the results of the three. Apart from adjusting for receivables and a few other items, each of these applied a factor to gross receipts of the practice to arrive at a valuation. Alerding took the view, with which we agree, that the form of business organization is essentially irrelevant to this analysis although it may have income tax consequences. Similarly, although the issue arises frequently in the context of a professional practice, the same principles apply to any self-employed individual. Two of the three methods Alerding used capitalized an income stream to measure the intangible value of Yoon's practice. In simplified form [3] these were 1) comparison of Yoon's net income to an industry standard ratio of physician compensation to gross receipts of the practice [4] and 2) comparison of Yoon's net income to industry averages for Hematology/Oncology. [5] The third method was a rule of thumb that a practice has a value of a percentage of gross receipts that usually runs between forty and sixty percent. Alerding testified that this method was something of a leveler and was perhaps most applicable to family practice. It is based on the value of the patient base if it were to be sold, typically, to a hospital or a group practice. [6] Alerding testified that the first of the three methods accounts, at least in rough terms, for differences in the effort expended by the physician, but did not make a similar claim for the other two. According to Alerding's testimony, this intrinsic value is the value of the practice to the physician. This appears to equate to the value of the physician's future earning capacity. The methods used essentially compare the profitability of a given practice to industry norms. This variance, however, could obviously be due to factors that are unique to the individual (a famed surgeon can command very high rates for services) or to the practice (a near monopoly in a geographic area where there is little cost containment effort). Because it does not differentiate between value uniquely dependent on the physician, the methodology used by Alerding conflicts with the mandate of the statute that only property be divided. Moreover, Alerding and Porter, 526 N.E.2d at 224, stated that the value of a professional practice need not be marketable and the trial court expressly found intrinsic value beyond its market value. This approach is equally incompatible with the statutory scheme. From this we can only conclude that the trial court's property division included a value attributable to Yoon's future earning capacity. Accordingly we reverse and remand for a determination of the value of Yoon's practice attributable to the practice as a business without Yoon. Although we do not find the trial court's approach consistent with the statute, we also do not fully agree with Yoon's analysis. As noted above, we do not agree that all goodwill of Yoon's practice is necessarily excluded from divisible property. Yoon contends that a portion of his very large gross revenue is attributable to his hard work and long hours. That may be true, but it is not necessarily dispositive. If Alerding is correct that there is a value in a patient base that is roughly proportional to gross receipts, perhaps some of the value of enhanced gross revenue inheres in the business even if it was generated by individual effort. The record is silent on these points. Nor is there any discussion of whether the rate at which patients return for treatment varies with the type of practice or, if so, how that affects the value of a given level of annual receipts to a practice buyer. Alerding testified that his first method (attributing an industry standard ratio of physician income to gross receipts) automatically adjusted for unusually hard work and long hours. He explained that by pointing out that the higher level of gross receipts, the lower the percentage of costs to receipts, i.e. because a large part of a physician's costs are fixed, the higher the level of receipts, the higher the profit margin on the incremental dollar. This is presumably correct, but what it says, in substance, is that the use of an industry average percentage of profit to gross as a measure of value undervalues a business that has an unusually high level of gross receipts. The goal in a dissolution, however, is not to value the business (including the professional) for a buyer. Rather it is to identify the portion of the value that is attributable to the business without the professional's continued participation. To the extent that the high level of receipts is due to factors unique to Yoon, for example, unusually long hours, the enterprise value, if any, is only whatever value exists in the patient base and would be transferrable to a buyer unwilling to work the same long hours. There was no evidence presented that the business itself has goodwill associated with it and Alerding declined to express an opinion as to the value a willing buyer might pay for Yoon's practice without Yoon. Yoon testified that he does not obtain new patients through a contract or an automatic referral system and Nam points to no other evidence that the practice as a business had contracts for services or other assets that would remain with the practice were Yoon not the physician. In sum, to the extent that goodwill of a professional practice is personal goodwill, its value is properly considered under Indiana Code § 31-1-11.5-11(c) which requires the court to consider the earning capacity of each spouse if it deviates from the equal division presumption, but is not itself property that is to be divided. To the extent goodwill is enterprise goodwill, it is divisible. Accordingly, we remand to the trial court for a determination of the value of Yoon's practice in excess of the value attributable to Yoon's personal goodwill, and for other proceedings consistent with this opinion.