How to Divide a Doctor’s Office With Your Spouse After Your Divorce
Dividing a medical practice during a divorce can be more challenging than other professional practices. After the value of a pediatrician’s office or radiology practice has been determined, the next stage is the actual division: who gets what. You and your spouse can work out the details of how to split certain assets. If you cannot reach an agreement, then a judge will divvy up the assets based on the facts and circumstances of your case.
How Property is Divided During a North Carolina Divorce
When dividing your assets, a court will determine what is marital property and what is separate property. Anything that is marital property can be divided and shared with your spouse. Assets you had before the marriage are separate property and not included in the division.
Keep in mind court will only get involved if you and your ex-spouse cannot reach agreement. Throughout the divorce process, you will have opportunities to work with your ex-spouse to decide on a split that works for both of you. Courts are only for those couples who fail to agree. It’s only after you fail to reach a compromise with your spouse that the court will step in and divide your property for you.
Assuming you’re unable to reach a written agreement between you and your spouse, North Carolina divorce law provides that marital property, including a medical practice, be divided equally unless a court finds that an equal division wouldn’t be equitable.
This process is called equitable distribution. Each spouse owns the income he or she earns during the marriage. Each spouse also has the right to manage any property that is in his or her name alone.
A judge will divide marital property in a way that the judge deems equitable, but this type of division will not necessarily be equal. A judge will consider numerous factors when dividing marital assets, including a spouse’s earning potential. These factors will affect how much of a medical practice will be awarded to either spouse.
Three Ways to Divide a Medical Practice
Both spouses may have ownership rights in a medical practice. The following example illustrates three common methods for dividing a practice.
Bob and Susan are both pediatricians. They jointly own and run a practice in North Carolina. They agree that the practice is worth $250,000. Bob is moving to South Carolina while Susan will stay in North Carolina. Susan wants to continue running the practice but Bob wants to get every last dollar out of the practice before he moves away.
Sell the Business and Divide the Profits
The advantage of this option are that both Bob and Susan may profit from a sale of the business. Susan could re-invest her proceeds into a new local practice while Bob could use the money for new business ventures.
Additionally, this option affords both Bob and Susan the opportunity to cut ties with each other and move on after the divorce. They will not have to remain in contact after the sale and can have a clean break once the divorce is finalized.
Downsides to Selling a Medical Practice
One downside is that a sell-off could take some time; many practices cannot be sold easily and it may be months before a buyer is found.
Another downside is that a sell-off may not yield a profit due to numerous economic factors like a tough market for pediatric care or increased competition in the area. In that case, Bob and Susan may want to explore a different option so they do not have to take an offer lower than they both wanted.
Buy Out the Other Spouse’s Interest
In a buyout, one spouse keeps the practice in his or her name and pays for the other spouse’s interest.
Timing can make a buy-out the most convenient choice when dividing a practice. If Bob and Susan can reach a deal where Susan pays Bob, then the practice can be divided right away. A buy-out eliminates the potentially long process of selling the practice and cuts ties between the divorcing spouses.
Since Susan wants to stay in North Carolina, this may be her most preferred option. She can pay Bob an agreed upon amount of money and he will no longer be a part of the practice. She can get back to work quickly without the hassle of selling or keeping Bob involved in the practice.
Additionally, since Bob is moving away, he may also prefer the buy-out option because it offers him a windfall payment once they reach a deal. He would not have to wait for a sale to go through and could quickly move away.
Potential Downside to Buying Out Your Spouse
One downside to a buyout is that it may pose a financial strain on the spouse buying out the other spouse. The buying spouse may not have enough cash or liquid assets available to pay off the selling spouse right away.
Mix Assets and Cash Payment(s) to Purchase the Practice from Your Ex
Alternatively, the spouses could offset the selling spouse’s portion of the business with other assets. Let’s assume that Susan and Bob agree that Susan will pay $125,000 (exactly 50%) to buy out Bob. If she cannot afford to pay out that $125,000 right now, Susan can use other assets such as:
- Home equity line of credit or other funds from the marital estate (such as vacation or investment properties)
- Investment Accounts, such as IRAs or 401(k) plans (keeping in mind the potential taxes paid when withdrawing from these accounts). A loan may also be an option for certain plans.
- Borrowing against a non-retirement portfolio, using the investments (stocks, bonds, and mutual funds) as collateral.
- Borrowing against the value of the practice.
Bob and Susan could also enter into an agreement, and this is the most frequently employed option, providing Bob be paid over time.
- Susan would likely sign a promissory note and it will provide a reasonable rate of interest, a definite length, and a principal amount.
- For example, Bob could agree to receive a monthly payment from Susan for the next 6 years, including interest. This option allows Susan to avoid paying the agreed-upon $125,000 all at once and gives her more flexibility to space out the payments.
- Keep in mind that Bob and Susan define the terms of the payment. There is no universal payment plan that will work for every divorcing couple. Make sure the terms are reasonable and based on informed financial projections. The process of making continued payments to an ex-spouse can be difficult since it prolongs some type of interaction, even if it just a financial relationship. Take this into account when negotiating your payment terms, especially the length of years it will take to pay off the note.
- A mix of assets could also satisfy the $125,000 buy-out – it does not all have to be in one financial bucket. Susan could give Bob an equity interest in the home, funds withdrawn from a retirement account, and a recurring payment over a set term.
- A property settlement note or structured settlement also has some drawbacks. If the agreement is not followed, it becomes another issue to fight over between a couple that has already divorced. Moreover, Susan would have a difficult time repaying the loan if she suffers some catastrophic event such as an accident or medical condition.
Loans as a Buy-Out Option
Besides selling off assets or entering into a payment plan, Susan could also explore more immediate options to avoid prolonging involvement with Bob. These options include loans (discussed in more detail below) and selling her portion of the office to her fellow doctors.
For example, Susan could sell her portion of the building to her partners and rent space back from them. Then, she could compensate Bob based on the money she received for her portion of the building. This would help her raise the funds more quickly than a payment plan because she would receive money immediately after selling her real estate stake.
There are many options when it comes to a buy-out but it is important that all terms and conditions are written and agreed to before commencing payment.
Co-Own the Practice with Your Spouse
With co-ownership, both spouses continue to own the business after the divorce. If spouses remain amicable, this option may reduce the hassle of agreeing to buy-out financing or enduring a long process to sell the practice.
Bob and Susan may prefer the co-ownership option if they can maintain a solid working relationship and still trust each other with managing the practice. Since Bob wants to move, he could agree to accept future proceeds from the practice while Susan maintains day-to-day control.
Potential Downside to Co-Ownership
If there is still animosity between Bob and Susan, continued co-ownership is the least preferable method of dividing a practice and not a viable solution.
Wrapping Up
After a value has been placed on a medical practice, distributing the assets of the medical practice will require negotiation and compromise. Selling the entire business, buying out the other spouse, and co-owning after a divorce are the three most common ways for spouses to reach a fair resolution.
Each method has benefits and downsides that vary depending on each spouse’s financial situation, time constraints, and relationship with the other spouse. Carefully consider your specific goals and how each way of dividing your practice can help you reach those goals before choosing one method.
