If you or your spouse owns a medical practice, that practice may be one of the most valuable assets involved in your divorce. But dividing a medical practice isn't like dividing a bank account. You can't simply look at the balance, divide it in half, and move on.
A medical practice may include equipment, accounts receivable, business interests, liabilities, and something much harder to put a number on: professional goodwill. That's why determining what a medical practice is worth can become one of the more complicated financial issues in a New Jersey divorce.
Is a Medical Practice Marital Property?
A medical practice, or an ownership interest in one, may be subject to equitable distribution if it was acquired or developed during the marriage. That doesn't necessarily mean your spouse 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 statutory factors that apply to property division.
The first step is determining what interest in the practice is actually subject to equitable distribution. The next problem is figuring out what that interest is worth.
How Do You Value a Medical Practice?
This usually isn't something I would want to determine by looking at a tax return or balance sheet alone. A medical practice can have both tangible and intangible value.
Depending upon the practice, a valuation may need to consider things such as:
- Medical and office equipment
- Cash and other business assets
- Accounts receivable
- Business liabilities
- Ownership interests
- Historical earnings
- Compensation paid to the physician
- The structure of the practice
- Professional goodwill
For a significant medical practice, a qualified business valuation or forensic accounting professional may be necessary. And don't be surprised if the two sides disagree about the value.
What Is Professional Goodwill?
This is one of the most important concepts in valuing a professional practice. Goodwill is an intangible asset.
Think about a doctor who has spent years developing a successful practice, building a reputation, establishing a patient base, and creating an ongoing business that produces income.
Some of the value of that established practice may exist beyond the desks, computers, medical equipment, and cash sitting in its accounts.
New Jersey recognizes that professional goodwill can have value for purposes of equitable distribution. But there's an important distinction.
A doctor's future earning capacity by itself isn't the same thing as goodwill. A medical license isn't simply assigned a dollar value and divided between the spouses.
The question is whether an established professional practice has developed an economic value that exists as a result of the business and professional reputation built during the marriage.
Why Can Goodwill Be So Difficult to Value?
Because you're trying to place a present value on something you can't physically touch. Two doctors may earn the same income but have very different practices.
One might work extraordinary hours in a practice that depends almost entirely upon that doctor's personal labor. Another may own an established practice with other physicians, employees, systems, recurring patients, and a business structure that has substantial value beyond any single day's work. That's why valuation can become highly fact-specific.
New Jersey courts have recognized that valuing goodwill requires care. A physician shouldn't have to pay a former spouse real dollars for an inflated or speculative business value.
At the same time, genuine economic value created during the marriage shouldn't simply disappear from the marital estate because it's difficult to calculate.
Does the Non-Doctor Spouse Get Part of the Practice?
Usually, that's not the practical way this issue is resolved. Equitable distribution doesn't necessarily require every marital asset to be physically divided between the spouses.
If the physician is going to continue practicing medicine, the more practical solution may be for the physician to retain the practice while the value of the other spouse's equitable-distribution interest is addressed elsewhere in the settlement.
For example, the other spouse might receive additional cash, investment assets, retirement assets, equity from the marital home, or an appropriate payment from the physician spouse. The exact structure depends upon the value of the practice and the rest of the marital estate.
What If the Practice Existed Before the Marriage?
That creates another issue. If a doctor already owned a medical practice before getting married, don't automatically assume the entire current value of the practice is excluded from equitable distribution.
The premarital ownership and value may be important. But we may also need to examine what happened to the practice during the marriage.
Did it grow substantially? Were marital resources invested in it? Did the non-physician spouse contribute directly or indirectly to the practice or the marriage while the physician developed the business? Did the ownership structure change?
The answers can affect the equitable-distribution analysis. This is one reason obtaining reliable financial records and understanding the history of the practice can be so important.
What If the Doctor Is Part of a Group Practice?
Owning 100 percent of a private medical practice is different from owning an interest in a larger physician group. If the doctor is a shareholder, member, or partner, the governing documents may contain important information about the ownership interest.
There may be restrictions on transfers, formulas for calculating a physician's interest upon departure, buy-sell provisions, or other contractual terms affecting value. Those provisions can be important.
But a number appearing in a partnership or shareholder agreement isn't necessarily the end of the divorce valuation analysis. Your attorney and valuation expert may need to determine exactly what the agreement measures and whether it accurately reflects the value relevant to equitable distribution.
Be Careful About Double Counting
There's another financial issue that can arise when a medical practice is involved. The doctor's income may be relevant to support. Their ownership interest in the practice may also be relevant to equitable distribution.
Those are different issues, but the financial analysis needs to be done carefully so the same economic benefit isn't improperly counted twice. This is another reason cases involving professional practices often require coordination between the divorce attorney and financial experts.
What Records Should You Gather?
If a medical practice may be a significant marital asset, the financial information can be extensive.
Depending upon the circumstances, relevant records may include:
- Business tax returns
- Profit-and-loss statements
- Balance sheets
- Bank statements
- Accounts receivable information
- Payroll and physician compensation records
- Partnership or shareholder agreements
- Buy-sell agreements
- Ownership records
- Business debt information
- Prior business valuations
- Employment and compensation agreements
Don't assume the value shown on one document tells you what the practice is actually worth for divorce purposes.
Look at the Entire Financial Picture
If you're the physician, you may understandably be concerned about protecting the practice you've spent years building. If you're married to the physician, you may be concerned that one of the largest assets created during your marriage is difficult to see and even harder to value.
Both concerns are legitimate. The goal isn't necessarily to break apart the medical practice. 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.
When a professional practice represents a substantial part of the marital estate, getting the valuation right can make an enormous difference.
If you're preparing for divorce and want to understand property division, business interests, 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