New York Divorce Lawyer & Attorney : Law Office of David A. Gabay : Serving New York City, Long Island, Suffolk County, Nassau County

The valuation and distribution of the personal professional goodwill of a single owner service business or practice is a highly contentious issue. Personal professional goodwill is the portion of a business’ professional goodwill attributable to the presence or reputation of the owner or other key person. For example, suppose a medical practice has a goodwill value of $5 million, but that the doctor who owns the practice is a nationally recognized expert in his field. If the doctor left the practice, half of the patients of the practice would follow him to his new practice. In such a case, the personal professional goodwill attributable to the doctor is $2.5 million.

Although New York certainly allows for the valuation and distribution of this asset, the Courts have not adopted or required any particular valuation method. Therefore, the quality, credibility, and effectiveness of the appraiser, and the expertise and preparation of the attorney will be among the most critical determining factors in successfully presenting or defending a valuation of personal professional goodwill.

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The valuation of a professional practice in a divorce action in New York is a complex process. There are numerous legal, financial, practical, and evidentiary factors and considerations which must be identified, analyzed, and reconciled before a judge can determine the true value of a practice. 

Lee Rosen, of the Rosen Law Firm in North Carolina, recently published a concise overview of the valuation process. I thought the article did a very good job of identifying all of the steps in the valuation process and identifying the different issues which need to be addressed in a appraisal of a professional practice. The process and procedure for a valuation described by Rosen is generally the same in New York. 

The key to understanding how valuation is done in New York divorce actions is this: (1) there is no single required valuation method or technique, (2) the role of the expert appraiser is absolutely critical, and (3) the Court has enormous discretion in deciding what method to adopt, how to apply the method to the facts of the case, and in deciding the precise value of the practice. This ambiguity leaves a good deal of room for a competent, well-prepared, attorney or appraiser to effectively advance the client’s case.

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Expert testimony is required to determine the value of a party’s enhanced earning capacity based upon the acquisition of a professional license during the marriage. The quality of that expert’s work, including his methodology, assumptions, and allowance for different variables is absolutely critical to the Court in determining whether to accept or reject the testimony of that witness.

Sometimes, however, a retained expert’s work consists simply of plugging in some biographical information and income figures into a computer program and declaring the results to be his or her expert opinion. Little or no attention is paid to the unique facts and circumstances of the particular case. The Court’s reaction to such imprecise work can be devastating to the expert, the attorney, and the party who retained the expert.

In Somnnenfeld v. Sonnenfeld, Justice Robert A. Ross, the supervising justice of the Nassau County Supreme Court, reviewed and dicected the work of two expert evaluations of the enhanced earning capacities of the parties to a divorce action. The experts’ reports, which both attorneys stipulated to admitting into evidence at trial, were so bad in the eyes of the Court that it rejected them both and decided to appoint its own expert.

Sonnenfeld is an object lesson in the importance of retaining the right expert for equitable distribution purposes. It is also a reminder to attorneys that they are ultimately responsible (to the Court and their clients) for the quality and legal sufficiency of the expert’s report.

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