1. A Global Reach with a Local Perspective
How to Value a Professional Practice
www.decosimo.com
and What Discovery will be Necessary
MIKE COSTELLO, CPA, ABV, ASA, CFE, CFF
PRINCIPAL

2. D. Michael Costello
CPA, ABV, ASA, CFE, CFF
Principal | mikecostello@decosimo.com
Mike Costello's experience includes extensive consulting work
and testimony in tax, accounting, financial, economic, and
business issues of commercial litigation, with emphasis on
business valuation, economic damage and forensic accounting
issues in the healthcare industry. Mike has been retained in
healthcare litigation involving a physician practice breakup, a
breach of contract case involving a hospital chain, a wrongful
termination suit involving a hospital, an economic damages
case involving a lease of an image-guided radiotherapy system
and a breach of contract case involving a home health agency.
His business valuations have been used and upheld in various
courts, including the Tennessee Court of Appeals, and in
connection with buy-and-sell transactions.

3. VALUING THE PROFESSIONAL PRACTICE
1. Adjusting the Professional Practice Balance Sheet
2. Professional vs. Practice Goodwill
3. Determining the Value of the Practice (case study)
4. Initial Information Request
5. Initial Information Request List (expanded)

4. VALUING THE PROFESSIONAL PRACTICE
THE PRACTICE BALANCE SHEET
 ASSETS
 In the following slides, there is a discussion of the
most common types of assets that the appraiser
can find in professional practices. The list is not
all-inclusive and the appraiser should use his/her
judgment as to which assets are applicable to the
business being appraised.

5. VALUING THE PROFESSIONAL PRACTICE
CASH
Are the financials audited or were they compiled by an office
manager or bookkeeping service?
If they are thought to be wrong, bank statements should be
requested to obtain an accurate balance.
Cash is generally considered an operating asset, but if a
reduction in cash wouldn’t affect the operation of the practice
then the practice has excess cash and the balance sheet
should be adjusted.

6. VALUING THE PROFESSIONAL PRACTICE
ACCOUNTS RECEIVABLE
 If a company uses the cash basis of accounting it is necessary
to determine the value of accounts receivable in order to
include them in the value of the practice.
 Day sheets, accounts receivable journals, or a card system
(cards that are kept in the client’s file showing a debt or credit
balance) may be totaled to determine total receivables.
 Included in receivables are those which have been turned over
to a collection agency. The value of these receivables should
be included in the overall accounts receivable amount.
 Once the gross value of AR has been established, the appraiser
must adjust for uncollectible and slow-pay accounts. These
amounts can be obtained from an accounts receivable aging
schedule and the actual payment history.

7. VALUING THE PROFESSIONAL PRACTICE
WORK-IN-PROGRESS INVENTORY
 This asset might also be called unbilled accounts
receivable and is an asset typically found in practices
that charge hourly for professional or staff time, such as
CPA firms, consulting practices, and law firms.
 It is important to remember that practices using cash
basis accounting probably have already recorded all
expenses associated with the work-in-process inventory.
 For practices on the accrual basis, work-in-process
should be listed as an asset on the practice’s financial
statements and, except for minor adjustments, the
appraiser can use the figures shown on the financials for
the value of the work-in-process.

8. VALUING THE PROFESSIONAL PRACTICE
INVENTORY OF SUPPLIES
 Inventory will vary greatly depending on the type of
business.
 Though the appraiser can usually accurately
estimate the value of inventory for those practices
that do not have substantial value in inventory, the
appraiser should still tour the facility and at least
check the level of supplies kept.

9. VALUING THE PROFESSIONAL PRACTICE
PREPAID EXPENSES
 Two typical expenses are prepaid rent and
insurance.
 Since an appraiser is concerned with a specific
valuation date, prepaid expenses must be
reclassified into their appropriate categories on the
balance sheet to recognize the fact that future
expenses have already been paid.

10. VALUING THE PROFESSIONAL PRACTICE
EQUIPMENT
 As with inventory, the amount of equipment required
by a practice depends on what type of practice it is.
 The appraiser must determine if the equipment
should be appraised by a professional equipment
appraiser.
 The value obtained by the equipment appraiser must
use the same standard of value used in the valuation
of the practice (i.e. market value, liquidation value)
 An appraiser must inquire about any equipment that
might not be listed on the depreciation schedule.

11. VALUING THE PROFESSIONAL PRACTICE
LIABILITIES
 There may be several categories of liabilities not
reflected on the books of the average professional
practice. On the other hand, from a valuation
standpoint some may appear there that are not real
debt (such as deferred rent).

12. VALUING THE PROFESSIONAL PRACTICE
 ACCOUNTS PAYABLE
 Cash basis financials typically do not show accounts
payable.
 There are two basic methods for estimating accounts
payable:
 The appraiser reviews all unpaid invoices at the valuation date.
If field work is done substantially after the appraisal date, the
appraiser should request all canceled checks written during a
reasonable period of time after the valuation date, along with the
corresponding invoices.
 The appraiser begins with the total expenses shown on the
practice’s income statement. From this amount he subtracts
expenses that do not belong with accounts payable. The
appraiser considers the practice’s regular bill-paying procedures
to calculate the estimated accounts payable at the valuation
date.

13. VALUING THE PROFESSIONAL PRACTICE
ACCRUED LIABILITIES
 Accrued liabilities are expenses, such as payroll,
payroll taxes, or interest that are allocated to a prior
period but not yet due.
 One liability often overlooked is accrued employee
vacation time. If there is a significant amount of
vacation time pending, this liability should be
reflected on the balance sheet or disclosed on the
appraisal report.

14. VALUING THE PROFESSIONAL PRACTICE
DEFERRED LIABILITIES
 Deferred liabilities are broken into three categories:
 Deferred Revenues
 Deferred Expenses
 Deferred Taxes
 Deferred revenues are amounts that have been received from
services not yet performed. Deferred revenues may need to be
considered in law firms and consulting firms that receive
retainers before beginning work on the case.
 Deferred expenses are relatively unusual. An example of this
might be deferred rent.
 The purpose of deferred income tax appearing on financial
statements is to match income tax expense with the related
financial accounting income for the appropriate accounting
period. Deferred income taxes usually occur because of the
difference in timing between recognition of income or expense
for two different accounting systems of the same practice.

15. VALUING THE PROFESSIONAL PRACTICE
LONG-TERM DEBT
 Long term debt is usually associated with equipment
purchases. The appraiser should also check to see
if the debt is related to amounts due to the former
owner of the practice who sold it to the current
owner.
 If the amount is thought to be incorrect, copies of
the debt instruments and payment records should be
obtained.

16. VALUING THE PROFESSIONAL PRACTICE
LEASE OBLIGATIONS
 The appraiser should always obtain copies of all
leases of the practice whether the practice is a
lessor or a lessee.
 Future lease payments may be treated as long-term
debt, after separating imputed interest payable.

17. VALUING THE PROFESSIONAL PRACTICE
CONTINGENT LIABILITIES
 Contingent obligations are liabilities for which there
is insufficient information about the outcome to
know how to account for them on the financial
statements.

18. VALUING THE PROFESSIONAL PRACTICE
 The three approaches to business valuation -
 Asset Approach
 Market Approach
 Income Approach

19. VALUING THE PROFESSIONAL PRACTICE
 Professional vs. Practice Goodwill –
 “…the expectation of continued public patronage…”
 Personal Goodwill is the goodwill associated with the
individual
 Practice Goodwill is the goodwill associated with the
enterprise

20. VALUING THE PROFESSIONAL PRACTICE
 Blasingame v. American Materials –
 Important primarily because lots of other cases refer
to it
 Basically says that an appraiser should consider all
three approaches to value and choose a result from
among them (Delaware Block)

21. VALUING THE PROFESSIONAL PRACTICE
 Bertuca v. Bertuca –
 H owned 90% of a partnership that operated 7
McDonald’s franchises
 Ignores a BSA because it “does not affect the value of
his interest in the partnership determined on an
earnings basis”

22. VALUING THE PROFESSIONAL PRACTICE
 Inzer v. Inzer –
 Great discussion of the valuation issues
 Both H and W had signed BSAs related to his interest
in a Sonic franchise
 Appeals Court found that BSA value controlled since
both parties had signed it

23. VALUING THE PROFESSIONAL PRACTICE
 York v. York –
 Multi-specialty medical practice
 11 physicians
 10 nurses
 1 psychologist
 1 optometrist
 Owned a building and leased space to others
 Appeals Court did not remand due to inclusion of
goodwill

24. VALUING THE PROFESSIONAL PRACTICE
 Cunningham v. Cunningham –
 Appealed twice; first appeal is the one with the
valuation issue
 Professional goodwill should not be included in the
value

25. VALUING THE PROFESSIONAL PRACTICE
 Hazard v. Hazard –
 Medical practice value = $43K or $629K?
 TC said $200K
 Court of Appeals said $43K
 “…professional good will is not a marital asset…”

26. VALUING THE PROFESSIONAL PRACTICE
 Smith v. Smith –
 Good discussion of whether a law practice is marital
property
 Concludes that “professional good will is not a marital
asset…”

27. VALUING THE PROFESSIONAL PRACTICE
 Alsup v. Alsup –
 Ties the goodwill of a daycare to the presence of its
operator
 Therefore goodwill not a marital asset subject to
distribution

28. VALUING THE PROFESSIONAL PRACTICE
 Harmon v. Harmon –
 Parties stipulated to net asset value of H’s interest in a
clinic and a building
 H had a BSA that set a lower value on exit
 Trial Court found that W entitled to ½ of what H would
receive if he left
 Remanded for consideration of “all relevant evidence”
regarding value
 Great description of previous cases

29. VALUING THE PROFESSIONAL PRACTICE
 Wright v. Quillen –
 Mentions RR 59-60
 Valuation evidence admitted despite the fact that
practitioner
 Used a method he created himself
 Was not familiar with RR 59-60
 Was not familiar with Delaware Block

30. VALUING THE PROFESSIONAL PRACTICE
INITIAL INFORMATION REQUEST (AS OF THE VALUATION
DATE)
1. Financial information
a) Annual financial statements for the last five years,
b) Interim financial statements for the most recent year to
date and for the same interim period for the prior year,
c) Tax returns for the last five years,
d) Detailed depreciation schedules,
e) Any financial budgets and/or projections,
f) List of affiliated companies, partnerships, or
proprietorships and their financial statements for the last
five years,

31. VALUING THE PROFESSIONAL PRACTICE
g) Plans for capital expenditures for the next fiscal year
and beyond, and
h) Accounts payable and accounts receivable aging
schedules as of (valuation date).
2. Product and market information
a) Samples of trade publications regularly received by
the company,
b) Names of trade associations of which the company
is a member, and
c) Newspaper or magazine articles regarding company
products, services, or key employees.

32. VALUING THE PROFESSIONAL PRACTICE
3) Operating information
a) Level of operating leverage employed including loan
details and amortization schedules, and
b) Cost control measures in place or planned.
4) Personnel information
a) List of current officers and directors, including
background, experience, age, and compensation
including all company paid benefits (including company
paid auto, country club, life, disability, or other insurance,
travel and entertainment expense, or any other item for
which the owners receive benefits of a personal nature),

33. VALUING THE PROFESSIONAL PRACTICE
b) List of other key management personnel, including
job title, background, experience, responsibilities,
compensation and age of each,
c) Schedule of life insurance polices owned by the
company,
d) Organization chart,
e) Summary of pension and profit sharing plans, and
f) Employee handbook.

34. VALUING THE PROFESSIONAL PRACTICE
5) Other information (if applicable)
a) Articles of Incorporation,
b) Minutes of shareholders and board of directors
meetings for the last five years,
c) Major contracts and other agreements, including
loan agreements, buy-sell agreements, employment
agreements, franchise agreements, leases, etc.,
d) Current ownership list and list of any transactions in
owner’s interests since inception,

35. VALUING THE PROFESSIONAL PRACTICE
e) Description of physical facilities,
f) Previous appraisal of real estate, personal property
or the business, and
g) Previous offers to purchase company assets or
corporate interests.

36. VALUING THE PROFESSIONAL PRACTICE
INITIAL DOCUMENT REQUEST LIST (EXPANDED)
1) Business Interests – for (business name) for fiscal years
ended (as of valuation date)
a) Corporate Tax Returns
b) Partnership tax Returns
c) All Schedules and Attachments to Tax Returns
d) All Financial Statements – Interims and Year-Ends
e) All books, Journals, Ledgers and Accountants’ Work Papers
f) All payroll Tax Returns, Payroll Records and W-2s.
g) All bank Statements, Check Stubs, Cancelled Checks, Deposit
Records and Paid Bills.
h) Copies of insurance policies – Casualty, Liability, Life, Group,
Workmen’s Compensation, Disability, Medical and Cash
Values.

37. VALUING THE PROFESSIONAL PRACTICE
BUSINESS INTERESTS CONTINUED
i) All Shareholders, Partners, Buy-Sell and Employment
Agreements.
j) All Other Legal Agreements including Leases, Purchases of
Fixed Assets, Purchase of Business of Investment Interests
k) All Depreciation Schedules
l) Detailed Schedules of all Receivables and Payables.
m) Notes, Mortgages and any other Evidences of Indebtedness or
Receivables.
n) Copies of all Prospectuses and Documentation for tax Shelter
Investments.
o) Schedules of all Accounts Receivables, Accounts Payable and
Inventories as of the valuation date.
p) All Contingent Assets and Liabilities

38. VALUING THE PROFESSIONAL PRACTICE
2) Retirement Plans for fiscal years ended (as of
valuation date)
a) Copies of all Retirement Plans and Trust
Agreements
b) Annual Statements and Reports for any Pension
Plan, Profit-Sharing Plan, Keogh Plan or IRA Plan
reflecting Contributions, Earnings, Investments, and
Fund Balances

39. VALUING THE PROFESSIONAL PRACTICE
3) Professional Practice for years ended (as of
valuation date)
a) Patient Records, Appointment Books and Daily
Sheets
b) Current and Prior Procedural Fee Schedules.
c) Hospital and Other Procedural Records.
d) Schedules of all Accounts Receivable and Accounts
Payable as of (valuation date)

40. VALUING THE PROFESSIONAL PRACTICE
e) Copies of all Agreements or Contracts for Professional
Services, Professional Affiliations or Fee
Reimbursement.
4) Personal Interest for (company name) for years
ended (as of the valuation date)
a) All 1040s’ and State Income Tax Returns
b) All Interim and Year-End Personal Financial
Statements.
c) Schedule of all Personal Assets and Liabilities.

41. VALUING THE PROFESSIONAL PRACTICE
d) Schedules of all Insurance, Cash and Brokerage
Accounts, Investments, Real Estate and Other
Assets.
e) Schedules Detailing all Notes, Mortgages and Loans
and Cash Values of Life Insurance.
f) Broker’s Statements for all Accounts.
g) Check Stubs, Cancelled Checks, Bank Statements
and Deposit Records.

42. VALUING THE PROFESSIONAL PRACTICE
h) All Paid Bills and Receipts.
i) Schedule of Ownership Interests in all Business and
Investments.
j) List of all Safe Deposit Boxes.
k) Schedule of all Tax Free Investments and Tax
Shelter Investments.

43. VALUING THE PROFESSIONAL PRACTICE
l) All Purchases and Sales of Real Estate and Other
Assets Exceeding $1000 during the period
m) All Contingent Assets and Liabilities
n) All lawsuits involving the Parties and all Guarantees
by the Parties

44. CONTACT ME
MIKE COSTELLO
mikecostello@decosimo.com
800-782-8382
DISCLAIMER: The contents and opinions contained in this presentation are for informational purposes
only. The information is not intended to be a substitute for professional accounting counsel. Always seek
the advice of your accountant or other financial planner with any questions you may have regarding your
financial goals.