What Happens to a Dental Practice in a New Jersey Divorce?

A dental practice may include equipment, accounts receivable, real estate or leasehold interests, business debts, and other assets. It may also have something much harder to put a number on: professional goodwill.

That's why valuing a dental practice can become an important part of equitable distribution in a New Jersey divorce.

Is a Dental Practice Marital Property?

A dental practice, or an ownership interest in one, may be subject to equitable distribution if it was acquired during the marriage. That doesn't mean the non-dentist spouse simply receives half of the practice. New Jersey uses equitable distribution, which means marital property is divided fairly based upon the circumstances of the marriage and the factors established by law.

When a professional practice is involved, we first have to determine what portion of the practice is subject to equitable distribution. Then we have to figure out what it's worth.

How Do You Value a Dental Practice?

You can't necessarily determine the value of a dental practice by looking at its bank balance or tax return.

Depending upon the practice, a valuation may need to consider:

• Dental and office equipment
• Accounts receivable
• Cash and other business assets
• Business liabilities
• Historical revenue and earnings
• The dentist's compensation
• Ownership interests
• Partnership or shareholder agreements
• Professional goodwill

If the practice represents a significant part of the marital estate, a qualified business valuation or forensic accounting professional may be needed.

And don't be surprised if the spouses' experts don't initially agree about what the practice is worth.

What Is Professional Goodwill?

Goodwill is an intangible asset. Suppose a dentist has spent 20 years developing a successful practice.

Patients return. Families refer other family members. The dentist has developed a reputation in the community. The practice has systems, staff, an established patient base, and a history of producing income. Some of that may create economic value beyond the chairs, X-ray equipment, computers, and cash in the business accounts.

New Jersey recognizes that professional goodwill can, under appropriate circumstances, have value for purposes of equitable distribution. But that doesn't mean every successful dentist automatically has a large goodwill asset. Whether goodwill exists and what it's worth depend upon the facts.

Is the Dentist's License a Marital Asset?

No. There's an important difference between the dentist's professional license and an established dental practice. A professional degree or license represents the ability to earn income in the future. New Jersey does not treat that future earning capacity itself as property that can simply be valued and divided in a divorce.

But once a professional actually builds an established practice, goodwill may develop. That's different.

The valuation is concerned with the existing economic value of the practice, not simply what the dentist might earn over the rest of his or her career.

What Makes Dental Practice Valuation Complicated?

Two dentists earning the same amount of money can own practices with very different values. One may be working extraordinary hours in a practice that depends almost entirely upon that dentist personally treating patients.

Another may own a larger practice with multiple dentists, hygienists, employees, established systems, significant equipment, recurring patients, and a business structure capable of producing income beyond the owner's individual labor.

Those differences matter. So can the type of dentistry being practiced.

A general dental practice may have a different financial structure from an orthodontic, periodontal, oral surgery, pediatric dental, or other specialty practice. That's why simply applying a generic multiple to annual revenue may not tell you what a particular dental practice is worth for divorce purposes.

What About Accounts Receivable?

A dental practice may have already performed services for which it hasn't yet been fully paid. Those accounts receivable can have value. But you also have to consider whether the amounts are actually collectible, what expenses may be associated with collecting them, and how they're treated in the overall valuation.

The same principle applies throughout the valuation. We aren't just looking at how much money flows through the practice. We're trying to determine its actual economic value.

Does the Non-Dentist Spouse Get Part of the Practice?

Usually, that's not how the issue is handled in practical terms. The dentist may continue owning and operating the practice while the value of the other spouse's equitable-distribution interest is addressed through the overall divorce settlement.

For example, the other spouse might receive cash, investment assets, retirement assets, additional equity from the marital home, payments over time, or some combination of assets. The appropriate structure depends upon the value of the practice and everything else in the marital estate.

What If the Dental Practice Existed Before the Marriage?

Then we need to look more closely at the history of the practice. If the dentist owned the practice before getting married, the premarital ownership and value may be important when determining what is subject to equitable distribution. But the practice may have changed considerably during the marriage.

Did it expand? Were additional locations opened? Was expensive equipment purchased? Did the patient base grow? Were marital funds invested into the business? Did the non-dentist spouse work in or otherwise contribute to the practice?

Those facts may become relevant to determining what portion of the practice's value is involved in the divorce.

What If the Dentist Has a Partner?

Then the partnership, shareholder, or operating agreement may become extremely important. The agreement may contain provisions dealing with ownership, transfers, retirement, withdrawal, disability, death, or the amount paid when a dentist leaves the practice.

Those provisions can provide important information about the dentist's interest. But don't automatically assume that a buyout figure contained in an agreement conclusively determines the value for divorce purposes. The agreement has to be considered along with the financial records and the particular circumstances of the practice.

Be Careful About Double Counting

The dentist's income may be relevant to alimony or child support. The value of the dentist's ownership interest in the practice may also be relevant to equitable distribution.

Those are different financial questions. But when the value of a professional practice depends partly upon its earnings, the analysis has to be performed carefully to avoid improperly counting the same economic benefit more than once.

This is one of the reasons professional-practice divorces frequently require experienced financial professionals.

What Records Should You Gather?

If a dental practice may be a significant marital asset, relevant records can include:

• Business tax returns
• Profit-and-loss statements
• Balance sheets
• Bank statements
• Accounts receivable reports
• Equipment lists
• Business loan information
• Partnership or shareholder agreements
• Buy-sell agreements
• Ownership records
• Compensation information
• Prior business valuations

The exact information needed will depend upon the structure and size of the practice.

Look at the Entire Practice

If you're the dentist, you may be concerned that an unrealistic valuation will force you to pay your spouse for value that doesn't really exist. If you're married to the dentist, you may be concerned that a valuable business built during the marriage will be understated because so much of its value is intangible.

That's why the valuation matters. The goal isn't simply to pick a number or automatically divide the practice in half. It's to determine what portion of the practice is subject to equitable distribution, establish a supportable value, and account for that value fairly as part of the overall division of marital property.

If you're preparing for divorce and want to understand property division, professional practices, and the other financial decisions ahead of you, my free Divorce Smarter Course will walk you through the major issues involved in a New Jersey divorce.

Until next time,

Steve