Divorcing a doctor presents its own set of complexities, particularly when it comes to valuing and dividing a medical practice. Regardless of whether you’re a cardiologist, ophthalmologist, or general practitioner, establishing a thriving private practice demands extensive time and effort. After investing years or even decades into your medical career, the thought of relinquishing any portion of your practice’s value to your soon-to-be ex-spouse can be daunting.
However, your spouse is likely to have a different perspective. They may argue that they’ve made both direct and indirect contributions to the success of your practice and thus deserve a fair share.
Typically, though not always, before a medical practice can be divided, it must first be valued. This involves determining a dollar amount that reflects the practice’s worth, taking into account its assets, liabilities, and the intangible asset of goodwill or reputation.
A more general overview of business valuation for divorcing a doctor or divorce in Texas in general can also be found here.
When is Value Determined?
The first issue reached in valuing a medical practice is determining the date. Texas businesses are respected during the divorce of the parties.
This means that depending on how long a divorce goes on or if something should change the business’s value, experts may have to reexamine its value during the divorce.
As such, any significant increases or decreases in the value of your medical practice since the date of separation will be considered in the ultimate valuation.
Is My Spouse Entitled to a Piece of My Medical Practice?
Unless you had a premarital agreement saying otherwise, and most people do not, your spouse almost always has an interest in your medical practice. Still, even though your spouse may have a share of the practice’s value, they may not have the course itself.
The court must categorize, value, and divide all parties’ marital assets during the property division. How much your spouse is entitled to will depend on how the property is characterized—separate or community—and how the court distributes the marital estate. How the court distributes marital assets when divorcing a doctor can rely on a variety of factors.
Even when the court does award a large share of your medical practice’s value to your spouse, the court will not force you to co-own your training 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 do not have enough liquid assets readily available to do so. Consider a divorcing couple with very few marital assets other than the husband’s thriving ophthalmology 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 assets or money in some investments.
Judges typically avoid jeopardizing your business in cases of divorcing a doctor. They often won’t require an immediate buyout that could harm the practice. Instead, they have the authority to arrange payments over time, potentially spanning months or years, and may place a lien on your property until the debt is settled.
Who Determines the Value of the Medical Practice?
In divorcing a doctor, the value of your practice will be determined by one or more of these people in some combination:
- You and your spouse
- An expert business appraiser
- A judge
Can You and Your Spouse Agree on the Value?
Is there any possibility you and your spouse could agree on your medical practice’s value and distribution? If so, it may be worth exploring whether you can negotiate your divorce outside of court.
Attorneys can assist you in negotiating and drafting a separation agreement. Most physicians succeed in dealing with a division of their practice without judicial intervention.
Still, it’s challenging to reach an agreement without first getting a professional valuation. Most physicians are not regularly involved in buying or selling practices and lack information about the value of these assets.
A Business Appraiser’s Opinion
Hiring a business appraiser can be expensive, but usually, it is an essential expense. Your appraiser should be fair and impartial. They should have no 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 independent valuation expert.
Having an expert appraise your medical practice can facilitate an agreement or settlement out of court. But if you and your spouse cannot agree, try to look for an appraiser with litigation experience. In divorcing a doctor, being good at evaluating the value of a business is a different skill set from testifying as to the basis of that valuation.
The Judge’s Ruling
If you and your spouse cannot agree on your private practice’s value and distribution, 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 expert appraiser serve as an expert witness, and your spouse will likely have hired their appraiser.
Making Your Case for The Judge
Generally, during litigation, each party will have their expert appraisers with values favorable to them. Your spouse’s attorney will also cross-examine your expert, so it is crucial that your expert appraiser can handle the pressure of testifying in court.
But the judge will not necessarily choose between your or your spouse’s proposed values. For example, your expert appraiser might value your internal medicine practice at $500,000, while your spouse’s appraiser thinks $700,000 is more accurate. Your judge could agree with your appraiser or your spouse’s appraiser, or the judge could decide that your practice is worth $600,000, based on expert testimony and evidence. If your proposed value and your spouse’s proposed value are wildly disparate, the judge’s value will likely 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 to be unbelievable. In case your expert’s valuation seems low to you, the judge will probably think so too, and so will your spouse and their attorney.
A judge has the discretion to determine a business’s value using different methods and considering many various factors. However, the judge values your medical practice; they must identify which way was used and the factors that weighed on that decision.
How Medical Practices Are Valued
A variety of different methodologies can be used to value a medical practice. The value can also be affected by any of several subjective factors.
Methods of Business Valuation
1) Income-Based Approach
An income-based approach calculates the value of a physician’s practice by looking at the practice’s income. This can be done in two ways: using a formula to determine future income or a flat revenue percentage.
The formula-based income approach is the first and most common method for valuing a medical practice for a Texas divorce.
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 anticipated revenue of a way that is a member of an Accountable Care Organization will differ significantly from a fee-for-service practice.
Your relationship with your third-party payers may also be relevant in determining expected income. Whether you accept Medicaid or Medicare may be applicable. Also, if your practice does not take plans from individual major insurance companies, for example, it could affect your expected income.
A business can also be valued using a flat percentage of gross income that would depend on the industry. However, this valuation works best for companies 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 fair market value. But choosing 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 not easy to determine. However, with the recent trend of hospitals buying up private practices, there could be a market for yours or similar methods.
If any comparable practices have been sold lately, that could relate to the fair market value of your course. An analogous approach would have 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, implementing that formula can be tricky.
The practice’s liabilities include debts, mortgages, and long-term fixed costs. The practice’s assets, however, are not quite as easily ascertained.
Fixed Assets
Fixed assets are tangible, valuable things. These assets include such items as medical supplies, furniture, and medical equipment, and machinery. Yes, your $600,000 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 several 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?
Besides the ways mentioned above to calculate a practice’s value, a trial will also likely have goodwill value.
Goodwill value is not an easy concept, but at its most basic, goodwill value is your medical practice’s ability to earn returns over an average rate of return. Goodwill value can be affected by several factors. These factors could be specific to you, the practitioner, or they could apply to your practice more generally.
Methods of Valuation
In cases involving divorcing a doctor, there are multiple ways to determine a private practice’s goodwill value. These methods range from objective to subjective.
1) Capitalization of Excess Earnings
This method for valuing goodwill is complicated, but basically, it measures the difference in how much your practice earns compared to a moderate, comparable approach.
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 a moderate, comparable practice’s earnings
- Multiplying the difference by a capitalization factor
A capitalization factor is a discount rate, meaning it attempts to give a present value to expected future income. The capitalization factor is industry-specific and varies depending on the practice you are valuing.
2) Sales of Comparable Practices
Looking at the sale of comparable practices is another way to determine a private practice’s goodwill value. The court will look at sales of similar courses and then subtract your practice’s net assets.
Again, a comparable practice would be similar in size, specialty, and location. Since there is not always a ready market for medical procedures, it may be challenging to find an example of a comparable method recently sold.
3) Subjective Goodwill Factors
While the methods described above are objective measures for valuing goodwill, goodwill value can also be determined or affected by many subjective factors. These factors might be personal or practice-specific. These lists are but some of the myriad factors that might affect your practice’s goodwill value.
Personal Goodwill Factors
These examples relate specifically to you, the practitioner:
- Age & health
- Education and specializations
- Reputation in the community
- Experience
- Personality and bedside manner
Age & Health
Goodwill value can be affected by your age and health. It matters whether you are just getting started or if you are in the twilight of your career.
Education & Specializations
If you went to a prestigious school or have 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 particular problem. If you are that go-to person, it could factor into your practice’s goodwill value. And if you are from a prestigious or well-known family, that could affect you.
Experience
Patients 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.
Practice-Specific Goodwill Factors
These examples relate to your practice:
- Specialized Practice
- Location
- Potential for Growth
- Employees and Partners
- Payment Structure
Specialized Practice
Specific 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
In a bustling urban area, the practice may have a higher goodwill value than a similar practice in a sleepy rural town.
Potential for Growth
A dynamic practice with growth potential may have a higher goodwill value than those winding down.
Employees and Partners
Your employees can also affect the practice’s goodwill value. For example, you may be one of several physicians who own a stake. It may also matter if you have an extensive support staff.
Payment Structure
How your practice makes money can have a significant impact on its goodwill value. Goodwill values might vary depending on whether your practice bills on a fee-for-service or value-based model.
Your relationship with your third-party payers will also be meaningful, as will your patient base. For example, a practice with a wealthy patient base may have a higher goodwill value than one where most patients rely on public benefits.
Other Concerns
Here are more common scenarios and concerns that arise in divorcing a doctor, when a medical professional must value their practice for a Texas divorce.
My Spouse Worked at The Practice
If your spouse worked at your private practice, did you pay them a wage? During a divorce, it is advantageous to have paid your spouse a wage.
If your spouse worked without receiving compensation, it does not necessarily increase the value of the practice. Still, it does mean that your spouse has a good claim for having contributed significantly to the practice’s significance. This behavior usually is already factored into the Texas community property rule.
My Spouse Supported Me Through School
Similarly, if your spouse supported you during or paid your way through medical or professional school, this is already accounted for in the Texas community property rule.
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.
Conclusion
Divorcing a doctor involves navigating intricate legal and financial considerations, particularly concerning the valuation and division of a medical practice. While the doctor may have invested substantial time and effort into building their practice, the spouse’s contributions, whether direct or indirect, cannot be overlooked. As such, determining a fair division of the practice’s value becomes a critical aspect of the divorce proceedings. Ultimately, seeking professional guidance from experienced legal and financial advisors can help both parties navigate this complex divorcing a doctor process and reach a resolution that ensures fairness and equity for all involved.
Other Related Articles:
1. Divorcing as a Doctor in Texas
2. Why is divorce so hard for doctors? How can you make it easier on yourself?
3. Divorce for Doctors, Dentists, and Other Medical Professionals
4. Special Considerations When Doctors Divorce
5. Are Doctors Doomed to Divorce?
6. Dividing a Business: What You Need to Know About Valuation in Divorce
7. How will a buy-sell agreement impact the valuation of your small business in a Texas divorce?
8. Real Estate Evaluation in Texas Estate Planning
9. Protecting your medical practice in a divorce
10. What is community property in Texas?
Bryan Fagan, a native of Atascocita, Texas, is a dedicated family law attorney inspired by John Grisham’s “The Pelican Brief.” He is the first lawyer in his family, which includes two adopted brothers. Bryan’s commitment to family is personal and professional; he cared for his grandmother with Alzheimer’s while completing his degree and attended the South Texas College of Law at night.
Married with three children, Bryan’s personal experiences enrich his understanding of family dynamics, which is central to his legal practice. He specializes in family law, offering innovative and efficient legal services. A certified member of the College of the State Bar of Texas, Bryan is part of an elite group of legal professionals committed to ongoing education and high-level expertise.
His legal practice covers divorce, custody disputes, property disputes, adoption, paternity, and mediation. Bryan is also experienced in drafting marital property agreements. He leads a team dedicated to complex family law cases and protecting families from false CPS allegations.
Based in Houston, Bryan is active in the Houston Family Law Sector of the Houston Bar Association and various family law groups in Texas. His deep understanding of family values and his professional dedication make him a compassionate advocate for families navigating Texas family law.
