Choosing the best dental practice valuation expert for divorce proceedings

April 5, 2019

The valuation of a dental practice for a divorce is different than for a practice transition and not knowing this could cost you

There are quite a few supposed dental practice valuation experts waiting to be retained for the preparation of a valuation for the purpose of divorce proceedings. The valuation of a dental practice for a divorce is different than for a practice transition. One major distinction is a tax calculation isn’t necessary since the transfer of assets in a divorce between spouses is not taxable. There are other dissimilarities as well, some of which are explained in the succeeding paragraphs.

In which state is the divorce occurring?

Among the states, there are various descriptions of how a court decides upon the allocation of the dental practice assets to the spouse of the dentist.  Some states are known as “equitable distribution,” states.  In this process, the value of the dental practice is divided between the dentist and his or her spouse allowing the contributions of each spouse to the practice to be one of the determinant factors of who receives how much of an award. 

Examples may be how the spouse of the dentist put the professional through dental school and gave up a career of his or her own for the time and effort needed for the dentist to obtain a dental license. There could have been money contributed to the dental practice by the spouse of the dentist. The non-dental spouse may have worked at the dental practice without a salary or for nominal compensation to allow the practice to grow and flourish.

Equitable does not mean equal. The real meaning for the distribution of dental practice assets in states that use equitable distribution rules is for a fair distribution.  If the parties do not agree, a court will then decide what amount is equitable or fair for each spouse to receive from the dental practice assets. 

There are a number of states which use the community property approach whereby all assets, income and any other item of value is divided equally. This is a straight forward approach and the valuation of the dental practice for the purpose of divorce only has one approach to division, which is 50 percent to each spouse.  The dental practice valuation plays a significant role based on the determination of its value. Those methodologies used to prepare the valuation and to present the value are critical to a court’s final division based on the value accepted by the court.

Related reading: Divorce and the financial toll on the dental practice

Another approach some states use is known as common law. This approach is similar to the community property guideline where the assets are divided equally. 

Determining the valuation expert’s qualifications

During the interview process, a request for the resume of the valuation expert should be made. Finding out whether the expert evaluator has experience in appraising dental practices or whether he or she is a general business evaluator is very important. A good approach is to use a Certified Valuation Analyst (CVA) for the preparation of the dental practice valuation for the purpose of the divorce since there are certain guidelines which must be used. The CVA must adhere to those guidelines based on his or her licensing requirements. It is also important to find out how many dental practice valuations the expert has prepared as well as how often he or she has testified. Whether the expert has sold any dental practices is another nice aspect of the experience and expertise of the evaluator.

One of the items that probably encompass the largest percentage of the allocation of the dental practice asset value is the goodwill. The attributes of goodwill is of extreme importance. The goodwill of the individual dentist is considered a personal asset and not a marital asset. The other portion of goodwill is called the enterprise goodwill, or the goodwill of the practice itself without the dentist, which is a marital asset.

If the retained evaluator is a general business evaluator and not experienced in determining the goodwill of the practice, the dentist will lose a large amount of value due to the inexperience of the evaluator who was hired.  Evaluating “widgets,” is not the same as evaluating a dental practice.  The goodwill of a business enterprise typically has more of its goodwill allocated to it and not to personal goodwill since there usually are few individuals upon which a business is primarily dependent.