The Superior Court of Pennsylvania granted reargument en banc to the litigants in Silver v. Pinskey (2009), to consider whether Pennsylvania’s child support law might be pre-empted by the federal Social Security Act, precluding the trial court from ordering the parents to share the children’s derivative benefits. In this case, the mother initially had primary custody of two teenaged children following the parents’ separation. The mother was initially designated as the representative payee of the children’s Social Security benefits derived from their father’s retirement. Later, father won equally shared custody and was designated as the representative payee. The trial court ordered father to share half of the children’s Social Security derivative benefits with mother, noting that the Pennsylvania guidelines do not address the situation where an obligor is receiving such benefits. The Superior Court initially vacated the trial court’s order, prompting Father to request reargument, which was granted.

On reargument, Father argued that the Pennsylvania courts lacked subject matter jurisdiction to order him to share the Social Security derivative benefits with mother. He also argued that the trial court misapplied the criteria for granting a deviation from the support guidelines due to “other household income.” The Superior Court en banc held that it was not deprived of jurisdiction, as it had not altered the designation of the benefit payee. The Court also held that the Social Security benefit could be properly considered as grounds for a deviation from the child support guidelines. Yet, the Court held that the trial court had erred by ordering father to share the Social Security benefit while setting child support at $0. The Superior Court regarded this result, however well-intentioned, as “bordering” on violation of federal law. Consequently, the Court remanded to reconsider the child support guidelines.

Several other issues raised by Father were dismissed by the Superior Court. Specifically, Father argued that the trial court had no authority to order him to pay his proportionate share of medical insurance provided by the mother’s spouse or extracurricular activities including gymastics, softball, baseball, basketball, summer camp, and piano lessons. The Superior Court saw no merit in these arguments.

In divorce litigation where one of the spouses owns a professional practice, such as a medical practice, dental practice, law firm or accounting firm, the lawyers and their experts have to determine whether the business has value. Their determination depends upon whether the professional practice is believed to have enterprise goodwill.

Briefly, enterprise goodwill is the price that a buyer would pay for a professional practice over and above the value of its hard assets like equipment and supplies. In theoretical terms, enterprise goodwill is the reputation of the business that is not closely associated with a particular owner or professional. The opposite of enterprise goodwill is personal goodwill, which is the reputation and skill of the professional. Enterprise goodwill has value because it is transferrable but personal goodwill is not. Someone might be willing to pay for a name like Aspen Dental Systems, but what about Jane Doe, PC?

Increasingly, there is a market for professional practices that are not part of a regional or national chain. Dental practices, even those with a single location and single dentist, are bought and sold frequently. The same is true for specialty medical practics. Yet, primary care medical practices and legal practices are rarely bought or sold. So, how does a lawyer decide whether a professional practice should be evaluated by a business valuation specialist? Here are three signs that a professional practice might have value:

1. Actual transactions. If a professional or his/her partners have bought or sold their practices, it is more likely that there is transferrable enterprise goodwill. However, you must distinguish market transactions from succession planning. If the only transactions are between retiring partners and advancing associates, then there may not be much enterprise goodwill.

2.  Subordinates and equipment.  One reason why dental practices are increasingly transferrable is that dental procedures are performed by hygenists and associate dentists. If the owner of the practice is earning profit from other professionals and paraprofessionals, then a buyer might be willing to pay something to step into those shoes.

3.  Excess compensation. If a professional is earning substantially more than industry standards, then the professional’s practice might have enterprise goodwill. No buyer would pay to assume an existing practice if he or she could start a new practice for free – except if the existing practice were more profitable than a new practice would be. This criteria is based on the principle of substitution.

BVWire recently published a follow-up to its teleconference, Valuing Dental Practices, by raising a question about business valuation using the excess earnings method (also known as Treasury Method).

Where do you get your cap rates under an excess earnings method? It’s a question that came up at the recent BVR teleconference, Valuing Dental Practices, featuring BV experts James Andersen, Ron Seigneur, and Stephen Persichetti, a practicing dentist and professor of dental practice management. In answer to the query, one panelist explained, “When you’re using excess earnings, it’s appraiser’s judgment. I’ve seen reports that use Ibbotson or D&P. But your cap rate has to be larger, and sometimes significantly higher, as much as 40% and 60%.”

The BVWire™put the question to Seigneur, who cautioned, “There is no holy grail for developing the capitalization rate under the excess earnings method.” That said, he offered the following insights as a “reality check” for BV experts:

When breaking the economic returns of an enterprise out between the returns on tangible assets and the returns on the intangible assets, it is commonly accepted theory that the returns on the tangible asset base is less risky, and therefore, require a lower economic return to justify the risks associated with the tangible assets. On the other hand, the rates of return required for each class of assets (be they tangible, like cash, inventory, fixed assets, etc., or intangible, such as the reputation of the business, the customer base, etc.) must collectively reconcile to the overall economic return (e.g. capitalization rate) on the overall, all in, benefit stream of the entity.

For example:

If the enterprise is assumed to justify a 30% overall capitalization rate, the returns on the various categories of tangible assets will likely each be below this 30% combined return. The returns required to capture the risks of the various intangibles will likely each be above 30%, with the overall weighted or blended rates tying back to the 30% overall risk adjusted rate associated with the entity take as a whole.

I’m not sure I know the answer to this one, so I’m throwing it out there for comments.

One of my favorite email blasts, BVWire (published by BVResources), described several free resources that might interest professionals who are interested in the value of their medical practices.

1. Kaiser Family State Health Facts. In addition to excellent statistics on all things healthcare, this resource includes a chart showing Nonfederal Physicians per 1,000 Population in 2008 and the concentration of physicians in the Northeast U.S.

2. Centers for Medicare & Medicaid Services. Table 23 of the 2007 CMS Statistics, “Practitioners per CMS Region,” shows the number of practitioners per 100,000 population.

3. Merritt Hawkins & Associates. Their 2008 Survey of Primary Care Physicians is another must-see.

Additionally, BVWire provided a link to the free 2009 ASC Valuation Survey Results by HealthCare Appraisers, Inc., which contains valuation multiples and transaction activity as well as extensive practice survey results.