Summer 2022

Willamette Management Advisors Summer 2022 Insights

Thought Leadership in Professional Practices and Licenses Valuation, Damages, and Transfer Price Analyses

Editor for This Issue: Samuel S. Nicholls

Professional Practice Valuation, Damages, and Transfer Price Thought Leadership

Professional Practice Intellectual Property Valuation, Damages, and Transfer Price Analyses

Nicholas J. Henriquez and Robert F. Reilly, CPA

Analysts are often asked to estimate the value of, measure the damages to, or determine the appropriate arm’s-length transfer price for an intellectual property owned or operated by either a professional practice or a professional services company. Analysts are also asked to develop valuation, damages, or transfer price analyses related to intellectual property owned or operated directly by an individual professional practitioner. This discussion considers the many reasons for conducting such intellectual property economic analyses. This discussion describes the generally accepted intellectual property valuation approaches and methods. This discussion illustrates the application of several valuation methods through the development of illustrative examples. And, this discussion presents analyst guidance and analyst caveats with regard to the reporting of these professional-practice-related intellectual property economic analyses.

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Valuation of Professional Licenses and Other Individual Intangible Assets

Nathan P. Novak and Robert F. Reilly, CPA

As individuals, many practitioners need to hold licenses in order to provide their professional services, including practitioners of law, medicine, accountancy, and many other professions. In addition to government-issued professional licenses, these professional practitioners may also own and operate other individual intangible assets, including client relationships, services names and service marks, affiliation and other agreements, and many others. As entities, professional practices and professional services companies typically own and operate practice licenses and other intangible assets. Such other intangible assets may include client relationships and contracts, client and other files and records, an assembled workforce, employment and noncompete agreements, trademarks and trade names, and various permits and contracts. Valuation specialists are often asked to value these practitioner or entity licenses and other intangible assets for various regulatory, accounting, taxation, transaction, financing, litigation, or other reasons. This discussion describes many of those reasons. This discussion summarizes the relevant generally accepted valuation approaches, methods, and procedures. And, this discussion illustrates the application of those generally accepted valuation approaches and methods through several simplified illustrative examples.

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Professional Practices and Licenses Valuation Thought Leadership

Discount for Lack of Marketability in the Professional Practice Valuation

Samuel S. Nicholls and Robert F. Reilly, CPA

A valuation analyst (“analyst”) may be asked to value a noncontrolling ownership interest in a professional practice or a private professional services company for various reasons. Such a professional practice or professional services company may be a corporation, partnership, limited liability company, or any other form of business entity. Depending (1) on the professional practice valuation approaches and methods applied and (2) on the benchmark data incorporated in the valuation analysis, the analysis may initially conclude the value of the practice or the company ownership interest on a marketable ownership basis. That is, the practice or company ownership interest is valued as if it was freely traded on a public stock exchange. In such an instance, the analyst may have to apply a valuation adjustment to the initial (i.e., marketable) value indication in order to reach the final (i.e., nonmarketable) value conclusion. This discussion summarizes the various factors that an analyst typically considers in the measurement of a discount for lack of marketability (“DLOM”) adjustment associated with the valuation of a noncontrolling ownership interest in a professional practice or a professional services company.

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Income Tax Thought Leadership

Criteria for Claiming a Worthless Security Loss Deduction

Samuel S. Nicholls and Robert F. Reilly, CPA

Many taxpayers are familiar with the Internal Revenue Code Section 165 worthless stock deduction. Taxpayers often call on valuation analysts to analyze and to document the worthlessness of the stock of a private company, corporate subsidiary, or some other common stock equity interest. The Section 165 loss deduction also applies to the worthlessness of a partnership interest, limited liability membership interest, or similar equity interest. Many taxpayers may not be aware that the taxpayer typically does not need to actually abandon the worthless security interest in order to claim the loss deduction. This discussion summarizes the requirements applied by the Internal Revenue Service and by the courts that allow taxpayers to claim the worthless security loss deduction (particularly when the worthless business ownership interest is not abandoned).

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