A recent California divorce decision, Marriage of Ackerman (2006), has been hailed by BVWire as the “Mandelbaum of reasonable compensation cases.” Yet, it is still unclear whether Ackerman will be as influential as Mandelbaum was on the issue of marketability discounts. Certainly, Ackerman is not as thorough and comprehensive in discussing the factors that a court should consider when determining the reasonable compensation of a manager/owner in the context of business valuation. Still, the California court’s decision is worth noting.

In Ackerman, the divorce court was presented with two competing valuations of a plastic surgeon’s medical practice. While the professional practice was non-marital property, its increase in value was community property subject to division upon divorce. Both experts used an “excess earnings” approach to valuation, but their comparative data for reasonable owner’s compensation was different.

In his valuation, the surgeon’s expert reviewed data culled from American Medical Associations’ national survey of self-employed surgeons. The expert determined the margin that surveyed surgeons were earning by dividing their net income by their gross revenues. The husband’s expert then applied that margin to the husband’s gross revenue to determine his reasonable compensation. The expert also made an informal survey of local surgeons as a “sanity check” after the expert reports were filed and exchanged.

The wife’s expert used data from the Medical Group Management Association’s survey of physicians’ compensation by geographic region, specialty and years in practice. The result of this survey was approximately one-third of what Husband was actually earning (which would have led to a much higher valuation of the husband’s practice). Frankly, this fact seemed to be the most persuasive reason why the court reached its decision in this case.

The court complained that neither party had introduced a vocational rehabilitation expert or headhunter to testify about reasonable compensation. The court also complained that the data used by the wife’s expert was not applicable because it was a survey of employee physicians instead of self-employed physicians. But the husband’s expert used national survey data rather than regional or local data, not specific to the medical specialty of plastic surgery, averaged over a period stretching back to 1996. The wife has filed a request for rehearing in the Superior Court of California. It will be interesting to see if this decision is reversed.