The value of a Patent Law Firm BGH XII ZR 40/09

The Federal  Court of Justice has recently issued a ruling on the value of the practice of a dentist, which includes the value of the substance as well as the goodwill. The result may be transferred to patent law firms (and to all other professional practices).

Here is how it goes: The value of the goodwill at a certain point in time is to be calculated under the presumption/hypothesis that the practice is sold. Relevant is thus the price which can be realized on the market. Presume there is an investor considering buying the practice and letting do the work by an employed professional person. The the salary B of the employed person corresponds to the value of the work contributing to the earnings. The rest is thus the profit of the goodwill. Start with the net earnings A of the practice per year and presume that a fraction of 10% thereof depends on the person of the owner to such an extend that it would not be realizable after a sale. A rough estimate of the earnings after the sale would therefore be A*0,9. Then, subtract the value of the work B contributing to the annual profit to obtain C=A*0,9-B.

This value corresponds roughly to the profit resulting from the goodwill the invesor may expect in the year after the acquisition.

It has to be multiplied with a factor F corresponding to the number of years in which the goodwill will be sustained. For the dentist's practice, the BGH has presumed a time of three years, wherein the profits of the second and the third year have to be discounted based on the basic banking interest rates, the general enterperneurial risk yielding a factor F sligthly below 3, in this case F=2,7620. The overall formula for the value V of the practice is thus

V=A(*0,9-B)*F.

In view of the typically long-term relations between patent attorneys and clients, the sustainability time for a patent practice could be set to a value higher than 3 years. However, for times beyond, say, 8 years, the discount factors (general enterpreneurial risk ... ) result in a very low weight in the overall sum such that factors F of more than 5 are unrealistic. For B, the salary of an employed patent attorney with some years of experience may be put in, i.e. something between 100kEUR and 120kEUR. However, I am not sure about this because I have never been employed.