Independent valuations of healthcare businesses for family law property settlements

Instructions and communication

Instructions must be in writing and must set out the issues on which the opinion is sought, request a written report, advise that it may be used in a proceeding and disclose the documents that will help the expert (rule 7.13). The parties give a single expert an agreed statement of facts, or, failing agreement, one each. No party communicates with a single expert alone: what one party sends goes to the others at the same time (rule 7.03), and a jointly appointed expert gives the report to each party at the same time (rule 7.07).

The valuation date

The instructions fix the valuation date. In property proceedings it is commonly close to the hearing or the settlement negotiations rather than to separation, because the court identifies the existing rights, interests and liabilities in property and the matter is run off a balance sheet settled shortly before trial. A value at an earlier date, such as separation, is sometimes also instructed to inform the assessment of contributions. Where more than one date is instructed we report each and explain what moved between them.

Market value, value to the owner and personal goodwill

Goodwill is the value of a business above its identifiable net assets: the expectation that patients, participants and referrers will keep coming. Transferable (commercial) goodwill attaches to what a buyer acquires, such as the premises, an approval tied to a location, systems, contracts, an employed workforce and registrations held by the entity. Personal goodwill attaches to the practitioner and leaves with them, as do the registrations and provider numbers in that practitioner's own name.

In many medical and dental practices the patients follow the practitioner, so much of the earnings is personal. In a pharmacy the approval and the location carry much of the goodwill. In an NDIS or allied health business it turns on whether participants and referrers are attached to the organisation and its systems or to the person treating them. What the practitioner would commit to after a sale, such as a handover, a service agreement or a restraint, is part of what makes goodwill saleable, and the report states what is assumed about it.

Market value counts only what a buyer would pay for, so a practice whose earnings depend on the owner may be worth little more than its net tangible assets while still producing a substantial income for that owner. Some instructions also ask for value to the owner: what the practice is worth to the person who holds it, on the benefits actually derived rather than on a hypothetical sale. Where both bases are instructed we report both and define each. How the court treats an income stream that could not be sold is a question of law; our task is to make the distinction visible and quantify it. See does a medical practice have transferable goodwill.

Earnings, methods and the interest being valued

We assess future maintainable earnings, the profit the practice can reasonably be expected to sustain, from normalised historical results. Normalisation removes owner-specific and non-recurring items, and is where family law valuations differ most from sale valuations: a spouse on the payroll above or below market rates, service fees to a related entity, rent paid to a related party or a self managed superannuation fund, private costs run through the practice, and the market cost of employing someone to do the owner's clinical work. Contractor arrangements and any payroll tax exposure attached to them affect both earnings and the liabilities a buyer would assume.

Earnings are usually expressed as EBITDA (earnings before interest, tax, depreciation and amortisation) or EBIT. Where goodwill is transferable, the common method is capitalisation of future maintainable earnings: maintainable earnings are multiplied by a factor, the multiple, reflecting the practice's risks, its dependence on individuals and its prospects. A discounted cash flow, which values forecast cash flows in today's dollars using a discount rate, may suit a business whose earnings are expected to change materially, such as a site still building its patient base. Where goodwill is personal, a net assets approach, valuing equipment, fitout, stock and other assets less liabilities, is often more realistic. Market evidence tests a conclusion rather than setting it: transaction data is limited, rarely like for like, and a price paid by a group or corporate buyer may reflect benefits a hypothetical buyer of this practice would not have. See what is maintainable earnings.

An earnings-based value also assumes a normal level of working capital, the debtors, stock and creditors needed to run the business, so we check what is held and adjust where it sits above or below that level. Stock matters far more in a pharmacy than in a consulting practice, and Medicare, health fund and NDIS receivables behave differently from ordinary trade debtors.

Practices are usually held through companies, unit trusts, discretionary trusts, partnerships and service entities. We identify which entity owns which assets and earnings, move from enterprise value, the value of the business before debt, to equity value, what is left for the owners after debt and surplus assets, then value the party's actual interest. For a minority holding, whether a discount for lack of control or marketability applies depends on the holding, the owners' agreements and the evidence. Whether notional costs of sale or a latent capital gains tax liability are brought to account is a matter for the instructions and, in the end, for the court. See share and equity valuations.

Disclosure, clarification and the report

The non-owner party rarely holds the records a valuer needs. At the time of writing the duty of full and frank disclosure of financial circumstances sits in the Family Law Act 1975 (sections 71B and 90RI) and Chapter 6 of the Rules, and reaches income and interests held through companies, trusts and partnerships a party owns or controls (rule 6.06). Before the first court date a party must serve, among other documents, the three most recent financial statements and last four business activity statements of any partnership, trust or company in which they have an interest (rule 6.06(7)). We issue one information request through the lawyers, record what was and was not produced, and disclose where the opinion rests on incomplete information (rule 7.22).

The report follows rules 7.21 and 7.22: addressed to the court and the instructing parties, verified by the expert's affidavit, with the instructions summarised, the documents relied on listed, and the methodology, facts, assumptions, any range of opinion and the reasons for the conclusion set out. Within 21 days of receiving it the parties may agree to confer with the expert to clarify it (rule 7.25), and may put written questions, once only and only for clarification (rule 7.26), answered in writing (rule 7.27). Where two or more parties intend to rely on different experts on the same or a similar question, those experts must confer at least 28 days before the first day of the trial at which the reports are relied on and prepare a joint statement of what is agreed, what is not and why, which does not bind the parties unless they expressly agree (rules 7.30 and 7.31). The engagement steps are at how it works.