Valuing a Law Practice and a Law Partner’s Ownership Interest for Divorce (Part 1) | AccountingWEB

Valuing a Law Practice and a Law Partner’s Ownership Interest for Divorce (Part 1)

Perhaps few cases illustrate the primacy of first defining the standard of value to be used than the valuation of a law practice or a law partner’s interest in the practice for equitable distribution in divorce.  When most people think of value, they are thinking in terms of fair market value, which is defined in the international glossary of business valuation terms as:

“The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms-length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.”

Fair market value would include discounts for lack of control and lack of marketability when valuing a partner’s interest if it represented a minority of the total ownership interests (such as a law partner in a firm of ten partners, each with equal ownership interests).  However, when valuing law firms for divorce, things are not that simple.

State laws may restrict or prohibit the sale of law practices.  In New Jersey (where I do a significant portion of my valuations), a sole practitioner could not sell his law practice goodwill to another lawyer.  So under fair market value, the value of the practice would be zero.  Under fair value for divorce, however, the answer can be dramatically different. 

Fair value for divorce is a legally derived standard of value whose definition varies from state to state, depending on the state’s marital dissolution statutes and their implementation in the state’s case law.  In most cases, fair value does not include the discounts for lack of control and lack of marketability that are used under the fair market value standard.  Thus for a law partner minority ownership interest, fair value is closer to a pro-rata share of the value of the business as a whole than it is to fair market value. 

Fair value for a law practice or law partner’s interest in divorce may diverge from fair market value’s emphasis on a price set between a willing buyer and seller as well.  Fair value in some states is based on a “value in exchange premise” where a hypothetical transaction between a buyer and seller is envisioned.  Under this premise, major differences in value can arise based on whether one assumes the seller will stay and assist in the transition of the law practice to new ownership, or whether the seller will instead be free to compete with the law practice immediately.  The valuation expert needs to be informed as to which assumption applies in the state.

This raises the related issue of valuing goodwill.  Goodwill could be considered the potential value of the law practice above the net tangible asset value.  When valuing a law partner’s ownership interest, it would be the potential value of the ownership interest above the value of the partner’s capital account.  Goodwill could arise from factors such as a lawyer’s extensive customer relationships or a lawyer’s reputation in the profession.  Goodwill can be divided into two components, personal goodwill which adheres to the individual, and enterprise goodwill, which is an asset of the practice.  The question then arises:  “What portion of goodwill is related to the law practice or partnership interest and what portion is personal goodwill?”  This can vary depending on the personal attributes of the attorney, his legal specialization, and the role of the attorney in the firm.  The issue is especially relevant when state law favors a “value in exchange” premise, as the issue of whether personal goodwill can  be transformed into enterprise goodwill by means of a non-compete contract and an agreement to stay on and transition the customer base may need to be considered.  The issue of distinguishing between personal and professional goodwill is less important in states where a “value to the owner” premise is the law.

In states that use a “value to the owner” or intrinsic value premise, it is not assumed that the practice will be sold.  Instead it is assumed that the practice will continue to enjoy the benefits of the law partner’s continued employment in the practice.  This premise produces a value that is intrinsically tied to the owner.  This intrinsic value premise is often used when state law seeks to compensate the spouse for the economic benefits the law partner will reap from the practice, whether or not these benefits can be easily sold.  In states where the “value to the owner” premise applies, it is usually not necessary to separate personal goodwill from professional goodwill. 

To summarize, we begin a valuation of a law practice or law partner’s ownership interest by first determining the relevant standard of value applicable in the state.  Next we determine the premise of value and consider whether goodwill needs to be categorized as personal or enterprise goodwill.  Now we are ready to consider applying valuation methodologies, which we will discuss in my next blog.


This blog

Raymond J. ("RJ") Dragon MBA, MS, ASA, CFFA is a Principal in Citrin Cooperman's Valuation & Forensic Services practice in the New Jersey / New York City area.  His work encompasses valuations for litigation support, marital dissolution, shareholder disputes, estate and gift tax, intangible asset valuation, purchase price allocation and financial reporting.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.


Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.


Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.


Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".


William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.


Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (, a software development firm of high-volume, high-productivity accounting and payroll technology.


Eva Rosenberg, MBA, EA, is the publisher of, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.


Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website:
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.


The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.


FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.


Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.


Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of a website devoted to training for governmental auditors.


AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish share their ideas, insights, and perspectives from across the pond.