About one in four dentists has been divorced or will experience a divorce in the future.1 In a divorce involving a dentist, one major challenge is determining how the dentist’s practice will be valued and considered in the overall set of spousal assets. A dentist’s practice is likely to be one of the biggest (if not the biggest) asset at issue in the divorce. The process of appraising and splitting the value of the dental practice is frequently one of the biggest challenges in a divorce between a dentist and the dentist’s spouse.
Equitable distribution or community property
How divorces proceed depends largely on which property scheme is recognized by the state in which the spouses live—equitable distribution or community property. Equitable distribution is used by 41 states and involves a court splitting all assets, earnings, personal property, and debts in a “fair” division as determined by the court. Some assets may still be exempt from being split by the court if the court finds that those assets are not marital assets.
Community property is the less common approach but is used in several highly populous states such as Texas and California. In a community property state, each piece of property that is owned by the spouses is classified as either community property or separate property. Community property typically encompasses earnings during the marriage, property acquired with those earnings, and debts incurred during the marriage. Separate property, on the other hand, includes premarriage earnings or property held by either spouse before the marriage. Community property is subject to being split during the divorce proceedings, while separate property fully remains the property of the person who owned it before the marriage.
The first hurdle in valuing a dental practice is determining whether the dental practice qualifies as property that can be divided between the spouses or whether it belongs entirely to one spouse. For example, one could imagine a dentist who spent 20 years building up an extensive practice, got married, and then divorced one year later. It is likely that the majority of the value of the dentist’s practice would be deemed to be the dentist’s own separate property. By contrast, if a dentist and spouse marry, the dentist then spends 20 years building up a practice, and the two subsequently divorce, it is likely that most of the value of the dentist’s practice would be deemed marital property and be subject to being split with the dentist’s spouse.
But how exactly does one go about valuing a dental practice for the purposes of a divorce? A valuation is meant to establish the fair-market value of the dental practice—the price at which the practice would be sold in an arms-length transaction between a buyer and seller where neither is under any pressure to buy or sell.
Valuing goodwill
One of the most difficult aspects of dental practice valuation is appropriately valuing “goodwill,” defined as “the value of a business or practice that exceeds the combined value of the physical assets.”2 Valuing physical assets is comparatively simple—for example, a particular piece of dental equipment can be purchased from other sites and has a market price that can be used for valuation.
By contrast, valuing goodwill requires asking what future cash flow is attributable to a purchaser operating the practice in place of the seller; in other words, what is the value to a future purchaser of the customer base, reputation, and existing practice that the dentist has established. In valuing goodwill, appraisers use a number of different factors, including the design of the dental facility, number of active patients, and patient turnover. But in general, the most important factors to value goodwill are annual gross revenue and dentist compensation.
Nonetheless, some courts have suggested that the type of goodwill at issue in a dental practice “is generally personal in nature” and thus does not qualify as marital property.3 But goodwill may still play a role in calculating maintenance or spousal support payments. A dentist’s projected future earnings are one of the factors that a court will consider when it seeks to determine the appropriate amounts that the dentist’s spouse will receive as spousal support—and those future earnings are closely tied to goodwill.
Two dental spouses
If both spouses are dentists at the same practice, it is likely not feasible for both of them to continue working in the same practice. And this scenario brings with it some additional valuation issues. What if both spouses started the practice together, but one has been more focused on patient acquisition/relationship building, while the other has had minimal involvement in that aspect of the business? The former spouse might argue that the practice’s goodwill should not be split evenly, especially if a court is likely to find that personal goodwill does not count as marital property. While this varies state-to-state, it may also depend on whether the practice is classified as a C corporation with shareholders, or some other entity, such as a partnership. Unlike in most other entities, shareholders in a C corporation maintain their own personal goodwill separately from the business. Even so, a spouse claiming to have a large amount of personal goodwill is more likely to be required to pay spousal support or alimony, given that a large amount of personal goodwill suggests that the spouse will greatly out-earn the other spouse after the divorce.
This scenario may also bring up issues of partnership and employment law, which are largely influenced by the state where the practice is located and the terms of any partnership or operating agreement. Does a divorce trigger any important clauses in the partnership, operating, or financing agreements? Do partner-spouses still have a joint duty to maintain the business until the divorce is finalized?
While these issues may not be top of mind in the early stages of a divorce or separation, they will soon become material when considering how and when to value and divide a jointly owned practice by divorcing dentists. Taking a close look at the operating, partnership, and/or financing agreements, and negotiating a temporary arrangement before the practice is valued and/or divided, may help to avoid lost goodwill, acrimony among staff and patients, and issues involving the practice’s financial backing.
The complexities described above lead to divorces that can be messy, contentious, and expensive. The average cost of a divorce ranges between $15,000 and $20,000, but that cost can be significantly higher for couples who have assets—such as a dental practice—that pose difficult valuation and division questions.4 For divorces involving a dental practice, if each spouse opts to retain their own lawyer, hire competing experts to value the practice, and litigate the case to completion, costs can easily reach six figures. And litigation carries risk for both parties—a court’s decision to split assets may be very unfavorable for one party or the other, and the court decision could require the sale of certain assets.
Avoiding conflict
There are alternatives to litigation that can lead to more favorable outcomes for both spouses. If possible, the spouses can try to collaborate on a settlement or divorce on amicable terms. The spouses could also consider engaging a mediator at an early stage. Mediators seek to facilitate negotiation between the spouses to avoid a lengthy and extensive litigation process. The costs of using a mediator are significantly lower than the costs of litigation, and can lead to an early resolution that prevents further conflict between the spouses.
Plus, if the spouses can avoid an immediate adversarial approach, they can agree on other elements of the divorce that may lower the overall costs to both parties. For example, if at a mediation the spouses can agree on the framework of a division of assets, but still need to have the dental practice appraised, they can agree on one neutral third party to appraise the dental practice and split the costs of hiring the appraiser.
References
- Ly DP, Seabury SA, Jena AB. Divorce among physicians and other healthcare professionals in the United States: analysis of census survey data. BMJ. 2015 Feb 18;350:h706. doi: 10.1136/bmj.h706
- Oldfather, Kosel, Reppy, et al. Valuation and Distribution of Marital Property. Matthew Bender, LexisNexis; 1984:23.04[1].
- In re Marriage of Schneider, 214 Ill. 2d 152, 291 Ill. Dec. 601, 824 N.E.2d 177 (Ill. 2005).
- Crail C. How much does a divorce cost in 2024? Forbes Advisor. Updated July 29, 2022. https://www.forbes.com/advisor/legal/divorce/how-much-does-divorce-cost/
Editor's note: This article originally appeared in DE Weekend, the newsletter that will elevate your Sunday mornings with practical and innovative practice management and clinical content from experts across the field. Subscribe here.
