The valuation of a business is often controversial, whether in the case of divorce, division of an estate or succession planning.
Specifically, the Federal Supreme Court of Switzerland had to assess the valuation of an orthodontic practice during divorce proceedings. When liquidating the matrimonial property regime, the assets are stated at their market value (Art. 211 Swiss Civil Code).
Continuation or liquidation
The decisive factor is whether a company is to be continued or liquidated. As the case may be, the valuation is based on the earning-capacity power or net asset value or on the liquidation value. Which valuation method is applied is subject to judicial discretion, provided it is comprehensible and plausible. Company figures must always be adjusted to exclude extraordinary events.
Individual-related business
In an individual-related company, it is the entrepreneur, her dedication and her personality that matter. The trust of the client is paramount. The question arises whether the company’s earning power is transferable to third parties. Consequently, a distinction must be made between individual-related and company-related earning power for the appraisal of a business.
Company-related earning power
The exclusively personal earning power, the entrepreneur’s own performance, has a value. This is neither transferable nor realizable and therefore not relevant to value. Thus, the value of the company is to be determined without the entrepreneur. Ultimately, the capital deployed, its interest and the goodwill are value-relevant (see Federal Supreme Court ruling 5A_361/2022 of November 24, 2022 consideration 3.3.1.4).
In an orthodontic practice, the personality of the entrepreneur is crucial. A client base is not easy to alienate. It is therefore not realizable on the free market. Consequently, the value of the business is to be appraised without the value of the personal performance of the entrepreneur. Practitioners often determine the earning-capacity value, including the entrepreneur’s performance. In casu, this appears inappropriate (see judgement 5A_361/2022 consideration 3.3.4).
In the instant case, the sole proprietorship had no capital of its own. The net asset value was CHF 0. Therefore, compensation for goodwill has to be determined. It must be justified why a buyer is willing to pay a certain amount for a customer base that is difficult to transfer (cf. judgement 5A_361/2022 consideration 3.3.4).
Buttom line
Sole proprietorships are individual-related. Customers of a practice are not always transferable. Only the business-related earning power is realizable. In individual cases, the price that a buyer is willing to pay for the business-related goodwill must be assessed by expert opinion.