Divorce is a difficult process, but having to value and divide a medical practice can make that process all the more trying.
Whether you are a cardiologist, ophthalmologist, or general practitioner, building a successful, private practice takes a significant amount of time and energy. If you have been building a medical practice for years or even decades, it can be very difficult to imagine giving up any of your practice’s value to your soon-to-be former spouse. However, your spouse will likely see it differently. Your spouse may have made direct or indirect contributions to the success of your practice and feel entitled to his or her fair share.
Before a medical practice is divided it it typically, but not always valued. There will a determination of the dollar amount designating the worth of the practice. The value will factor in the assets, liabilities and value of the goodwill or reputation of the practice.
A more general overview of business valuation for divorce in North Carolina can also be found here.
Value is Determined at the Date of Separation
The first issue reached in valuing a medical practice is determining the date of valuation. North Carolina businesses are valued as of the date of the separation of the parties. That date will be used by experts and by the court to establish a baseline of value. Of course, any significant increases, or decreases, in the value of your medical practice since the date of separation – attributable to work that occurred before the date of separation – will be considered in the ultimate valuation.
Is My Spouse Really Entitled to a Piece of My Medical Practice?
Unless you had a premarital agreement saying otherwise—and most people don’t—your spouse almost definitely has an interest in your medical practice. Still, even though your spouse may be entitled to a share of the value of the practice, they are not necessarily entitled to the practice itself.
During equitable distribution, the court must categorize, value, and divide all marital assets between the parties. How much your spouse is entitled to will depend on how the property is characterized—separate or marital—and how the court decides to distribute the marital estate. How the court distributes marital assets can depend on any variety of factors.
Consider Tim and Ellen. Ellen worked as a dentist at her father’s family practice. It had always been Ellen’s plan to buy out her father when he retired, but his retirement came earlier than expected when he became suddenly ill. Tim and Ellen decided to use Ellen’s savings and the money Tim had made selling his old house to buy out Ellen’s father. Over the next few years, Tim suffered several business failures while business at the dental practice thrived. When Tim and Ellen finally decided to divorce after eleven years of marriage, they fought bitterly over the value of Ellen’s dental practice and how much of that value should go to Tim. Eventually, the court awarded Tim a hefty share of the value of Ellen’s family dental practice during equitable distribution, much to Ellen’s chagrin.
Still, even when the court does award a large share of the value of your medical practice to your spouse, the court will not force you to co-own your practice with your ex-spouse. The court could award you sole ownership of the practice and compensate your spouse by awarding a larger share of the other marital assets. Or you could be forced to buy out your spouse’s interest in the business.
Buying out your spouse’s interest in your private practice can be tricky if you don’t have enough liquid assets readily available to do so. Consider a divorcing couple with very few marital assets other than the husband’s thriving dermatology practice. If the husband does not have enough cash on hand to buy out his wife’s share of his practice, he might have to liquidate some assets or cash in some investments. But generally, judges do not want to put you out of business. Most judges will not compel you to buy out your spouse immediately if it will result in the practice failing. Instead, judges have broad discretion to structure payments. Your judge could order you to buy out your spouse over a term of months or even years and can even place lien on your property until that debt has been satisfied.
Who Determines the Value of the Medical Practice?
The value of your practice will be determined by one or more of the following people in some combination:
1) You and Your Spouse
2) An Expert Appraiser
3) A Judge
Can You and Your Spouse Agree?
Is there any possibility that you and your spouse could agree as the value and distribution of your medical practice? If so, it may be worth exploring whether you can negotiate the terms of your separation outside of court. Attorneys can assist you in negotiating and drafting a separation agreement. Most physicians are successful in negotiating a division of their practice without judicial intervention.
Still, it can be difficult to reach a mutual agreement without first getting a professional valuation. Most physicians aren’t regularly involved in buying or selling practices and, of course, lack information as to the value of these assets.
An Expert Appraiser’s Opinion
Hiring an expert appraiser can be expensive, but it in most situations it’s an essential expense. Your appraiser should be fair and impartial. He or she should not have any ties to you, your spouse, or the medical practice.
Look for someone with credentials—a Certified Business Appraiser, Accredited Senior Appraiser, or a Certified Public Accountant. Ask if they have experience valuing medical practices. Typically, the retention of the appraiser is best handled by your attorney. Usually, each spouse retains their own, independent, valuation expert.
Having an expert appraise your medical practice can facilitate an agreement or settlement out of court. But in the event that you and your spouse just can’t agree, you should also try to look for an appraiser with litigation experience. Being good at evaluating the value of a business is a separate skillset from testifying as to the basis of that valuation.
The Judge’s Determination
If you and your spouse cannot come to an agreement about the value and distribution of your private practice, then the decision will ultimately lie with the judge.
During litigation, the judge will hear evidence on the valuation of your practice. You will have your own expert appraiser to serve as an expert witness, and your spouse will likely have hired his or her own appraiser as well.
Making Your Case For the Judge
Generally, during litigation, each party will have their own expert appraisers with values that are favorable to them. Your expert will also be cross-examined by your spouse’s attorney, so it is important that your expert appraiser can handle the pressure of testifying in court.
But the judge will not necessarily just choose between your or your spouse’s proposed values. For example, your expert appraiser might value your internal medicine practice at $400,000, while your spouse’s appraiser thinks $600,000 is more accurate. Your judge could choose to agree with your appraiser or your spouse’s appraiser, or the judge could decide that your podiatry practice is actually worth $500,000, based on expert testimony and evidence. If your proposed value and your spouse’s proposed value are wildly disparate, the judge’s value is likely to be somewhere in the middle.
If you want the judge to view your proposed value favorably, it should be fair to you but not so skewed in your favor that it’s not credible. If your expert’s valuation seems low to you, the judge will probably think so too! (Your spouse will definitely think it’s too low!)
A judge has discretion to determine a business’s value using different methods and in consideration of many different factors. Still, however the judge decides to value your medical practice, he or she must identify which method was used and the factors that weighed on that decision.
How Medical Practices Are Valued—The Nuts & Bolts
There are a variety of different methodologies that can be used to value a medical practice. The value can also be affected by any of a number of subjective factors.
Methods of Valuation
1) Income-Based Approach
An income-based approach calculates the value of a physician practice by looking at the practice’s income. This can be done one of two ways—by using a formula to determine future income or by using a flat percentage of income.
The first and most common method for valuing a medical practice for a North Carolina divorce is the formula-based income approach.
A formula-based income approach determines expected income by looking at the practice’s cash flow patterns over the last few years and assessing the risk and return on investment.
Your practice’s expected income will vary greatly depending on your specific operating procedures. For example, the expected income of a practice that is a member of an Accountable Care Organization will be very different from a practice that is fee-for-service.
Your relationship with your third-party payers may also be relevant in determining expected income. Whether you accept Medicaid or Medicare may be relevant. Also, if your practice does not accept plans from certain major insurance companies, for example, it could have an impact on your expected income.
A business can also be valued using a flat percentage of gross income. What that flat percentage of income would be depends on the industry. However, this type of valuation works best for businesses with predictable long-term expenses and cash flow. Realistically, this is probably not the best option for valuing a private medical practice.
2) Fair Market Value
A medical practice’s value can also be determined using the fair market value. But determining a medical practice’s fair market value is not as easy as it sounds.
Fair market value is the price a willing buyer would pay for the business on the market. But there is not generally a ready market for medical practices, so this can be very difficult to determine. However, with the recent trend of hospitals buying up private practices, there very well could be a market for yours or a similar practice.
If any comparable practices have been sold lately, that could be relevant to the fair market value of your practice. A comparable practice would be one that has the same or a similar specialty, of a similar size, and in the same or similar location as your practice.
3) Asset Approach
The asset approach to valuing a medical practice can be distilled down to the following formula:
ASSETS – LIABILITIES = PRACTICE VALUE
Unfortunately, actually implementing that formula can be quite difficult.
The practice’s liabilities include debts, mortgages, and long-term fixed costs. The practice’s assets, however, are no quite as easily ascertained.
Fixed Assets
Fixed assets are tangible valuable things. Fixed assets include such things as medical supplies, furniture, and medical equipment and machinery. Yes, your $500,000 MRI machine is a fixed asset! Still, expensive medical equipment may depreciate with age and use, and any money still owed on machinery should be counted as a liability. If you own the office building or property where your practice is located, that would be considered a fixed asset.
Other Assets
Aside from the fixed assets mentioned above, a medical practice also has intangible assets. Intangible assets could be any number of things, but commonly include accounts receivable or the value of any work in progress. This includes pending payments from insurance companies or other third-party payers.
What About Goodwill Value?
In addition to the above-mentioned ways to calculate a practice’s value, a practice will also likely have goodwill value.
Goodwill value is not an easy concept, but at its most basic, goodwill value is the ability of your medical practice to earn returns in excess of a normal rate of return. Goodwill value can be affected by any number of different factors. These factors could be specific to you, the practitioner, or they could apply to your practice more generally.
Methods of Valuation
There are multiple different ways to determine a private practice’s goodwill value. These methods range from objective to completely subjective.
1) Capitalization of Excess Earnings
This method for valuing goodwill is quite complicated, but basically, it measures the difference in how much your practice earns in comparison to an average, comparable practice.
The methodology for this approach consists of
- Finding practice’s average net income from the past few years
- Subtracting assets and a reasonable return on investment
- Comparing that with an average, comparable practice’s earnings
- Multiplying the difference by a capitalization factor
A capitalization factors is basically a discount rate, meaning that it attempts to give a present value to expected future income. The capitalization factor is industry-specific and varies depending on the type of practice you are valuing.
2) Sales of Comparable Practices
Looking at the sale of comparable practices is another way to determine the goodwill value of a private practice. The court will look first look at sales of comparable practices and then subtract your practice’s net assets.
Again, a comparable practice would be one that is similar in size, specialty, and location. As mentioned earlier, since there is not always a ready market for medical practices, it may be difficult to find an example of a comparable practice that was recently sold.
3) Subjective Goodwill Factors
While the methods described above are relatively objective measures for valuing goodwill, goodwill value can also be determined or affected by any number of subjective factors. These factors might be personal or practice-specific. The following lists are but some of the myriad factors that might affect your practice’s goodwill value.
Personal Goodwill Factors
The following examples relate specifically to you, the practitioner.
1) Age & Health
Goodwill value can be affected by your age and health. It matters whether you are just getting started or if you’re in the twilight of your career.
- Education & Specializations
If you went to a particularly prestigious school or if you have particular certifications or specializations, your practice might be more valuable than others.
- Reputation in the Community
Sometimes, professionals are known as the person to go to for a certain problem. If you are that go-to person, it could factor into your practice’s goodwill value. Additionally, if you are from a prestigious or well-known family, that could have an effect. - Experience
Patients tend to value an experienced physician. Experienced physicians may have known their patients for a long time and are more likely to have a loyal patient base. - Personality & Bedside Manner
If your patients like you and your personality, they are more likely to be loyal to you.
2) Practice-Specific Goodwill Factors
The following examples relate to your practice.
- Specialized Practice
Certain specializations may be more in-demand than others. For example, in a retirement town, a urology practice may be more valuable than a pediatric practice. - Location
A practice located in a bustling urban area may have a higher goodwill value than a similar practice in a sleepy rural town.
- Potential for Growth
A dynamic practice with potential for growth may have a higher goodwill value than those that are winding down.
- Employees and Partners
Your employees can also have an impact on the practice’s goodwill value. For example, you may be one of several physicians who own a stake in your practice. It may also matter if you have an extensive support staff.
- Payment Structure
How your practice actually makes money can have a major impact on its goodwill value. Goodwill values might vary depending on whether your practice bills fee-for-service or value-based.
Your relationship with your third-party payers will also be important, as will your patient base. For example, a practice with a wealthy patient base may have a higher goodwill value than a practice where the majority of patients rely on public benefits.
Other Concerns
Here are some more common scenarios and concerns that arise when a medical professional must value his or her practice for a North Carolina divorce.
My Spouse Worked at the Practice
If your spouse worked at your private practice, did you pay him or her a wage? During divorce, it is advantageous to have paid your spouse a wage. If you spouse worked without receiving compensation, it does not necessarily increase the value of the practice, but it does mean that your spouse has a good claim for having contributed significantly to the value of the practice. A judge may decide that a spouse’s unpaid labor at your medical practice merits awarding them an even higher share of the value of the business.
My Spouse Supported Me Through School
Similarly, if your spouse supported you during or paid your way through medical or professional school, he or she has probably gained a larger interest in the marital estate. Essentially, if your spouse supported you through school, he or she will most likely be entitled to a larger share of your practice’s value than otherwise.
What About My Medical License?
While your private practice can be considered a marital asset, your medical license is separate property. The value of your medical license will not be valued and distributed during divorce.
