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Special Considerations in Business ValuationThe key issue that arises with a professional practice is the goodwill of the enterprise. Goodwill is always an issue in any business valuation, but it may constitute more than half the value of a professional practice, because the hard assets of the enterprise are often relatively small. One way to calculate goodwill is to use the "excess earnings" method. This involves calculating a hypothetical "normal" earnings that would be expected given the hard assets in place. Any earnings above that hypothetical figure must by definition be "excess" earnings, attributable only to goodwill. Capitalizing this excess earnings figure will yield the value of goodwill. Another method of valuing a professional practice, gross but simple, is simply to take a multiple of annual billings. This multiple ranges from 75% to 150%, depending on the nature of the practice and the quality and consistency of the firm's client base. Special Considerations for Intellectual PropertyWhen the business or either spouse owns a patent, trademark, copyright, or trade secret, husbands and wives often disagree about its value when they're going through divorce. The issues are complex enough and appear often enough that I added a separate page on Valuing Intellectual Property in Divorce. Special Considerations for the Family Limited PartnershipWhen the family business is held in the form of a Family Limited Partnership (FLP), the adjustment of the value depends on whether the interest being valued is that of a general partner or that of a limited partner. Limited partners generally have less say in the management of the enterprise. For example, they can't force the partnership to go into dissolution, they can't change the partnership agreement, and they can't remove a general partner. Perhaps more importantly, they have little day-to-day control over the business. This means they can't decide which vendors from which to buy goods and services, whom to hire and whom to fire, how much compensation to pay to employees, or when to make a distribution to partners. For this reason, a limited partnership interest is generally worth less than a general partnership interest. In addition, again because of those control factors above, a limited partnership interest may be much more difficult to sell. It may be harder to sell to outsiders, and even harder to sell to anybody else within the partnership. Also, FLP's are often structured so that a limited partner can't sell his or her interest without the approval of one or more general partners. If a limited partnership interest is worth less because of all those factors described above, by simple mathematics, that means a general partnership interest in an FLP is worth more, because it carries with it all those controls that are absent for the limited partner. What this means, of course, is that the owner of a general partnership interest in an FLP enjoys a premium in the value of his or her interest. Special Considerations When One Person is KeyIn most (but not all) states, the business asset to be valued in divorce is not the total worth of the enterprise but the value of the enterprise severed from the labors of the person going through the divorce. That is, if this person were gone, what would the company be worth? Valuing the business becomes a process of imagining it without the key person, the business owner. Here are the key functions to analyze:
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