A pediatric practice founder learned the hard way that not all buyout agreements are created equal. According to a recent BVLaw Alert, a New Jersey court decided the buyout provisions of the practice’s operating agreement “required a calculation of the company’s value using the last agreed-upon company value,” which was to be “adjusted to reflect the increase or decrease in the net worth of the company … since the last agreed-upon value.” The last agreed-upon value of the company was $2.4 million as of 2000. The plaintiff’s expert argued that the increase in net worth of the company included consideration of intangible value and “developed a metric for calculating the value of the company’s intangible assets in 2016.” The expert’s conclusion of value ranged between $5.6 million and $6.75 million.
The defense expert disagreed, arguing that intangible assets are “not recorded on the balance sheet of an entity unless it is the product of an acquisition or some type of business combination.” The defense expert’s conclusion of value ranged between $2.8 million and $3.2 million.
The court disagreed with the plaintiff expert’s inclusion of intangible assets and stated the expert’s definition gave him the opportunity “to manipulate the Company Value calculation for the benefit of the Plaintiff.” The court chose to adopt the $3.2 million value as it was “mindful” the plaintiff could feel “shortchanged” by the decision. Ultimately, the court recognized the “language in the agreement and lack of any updated valuations gave it little discretion when determining the buyout price.” A periodic review of the practice’s buyout agreement and a current valuation may have made the difference between a $3.2 million and $6.75 million court decision. If your business valuations aren’t up to date or you’ve never had a business valuation performed, our business valuations professionals would be happy to discuss a valuation of your company.
BVLaw Alert: Experts clash over definition of ‘net worth’ in New Jersey buyout dispute