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Bruce Bryen is a certified public accountant with over 45 years of experience and is a part of Baratz & Associates CPAs. He specializes in deferred compensation, such as retirement planning design; income and estate tax planning; determination of the proper organizational business structure; asset protection and structuring loan packages for presentation to financial institutions. He is experienced in providing litigation support services to dentists with Valuation and Expert Witness testimony in matrimonial and partnership dispute cases. He is also a financial writer for several dental journals. You may contact him at 609-502-0691 or at Bryenb@baratzcpa.com.
Unpacking the differences and similarities in valuations for divorce and practice transition valuations.
Let’s start by underscoring that the preparation of a dental practice valuation for the purpose of a divorce is different from that of a practice sale in one very significant respect.
During the formulation of a valuation for the sale of a dental practice, the concept of value is undertaken with methodologies that would include an income tax factor. The amount to be received should have an income tax calculation in almost all cases for proof of the net proceeds to the seller. There are of course instances where there may be no gain on the sale of the dental practice, or there may be a tax-free exchange of the practice in another but in almost all cases, when there is more received than the basis of the dental practice, the seller of the practice must pay a tax on that amount.
The primary difference with a valuation for a divorce is that in the usual transfer of assets from the dentist to his or her spouse for the purpose of the divorce, those assets received by the spouse are not taxable at the time of their receipt. There are always exceptions but the general rule is that the major difference between these types of transfers of dental practice assets is the non-taxability of the divorce proceeds and the taxability of the net proceeds from the transition to a third party.
There are some other issues to look for when retaining a valuation expert for the purpose of the “divorce valuation”:
Once the dental practice valuation has been prepared for the purpose of its sale, a typical situation is that a dental-practice broker becomes involved or the dentist tries to market the transition himself or herself. He or she uses their expertise in attempting to market the practice for the highest price and the best terms available. Local trade journals, professional dental magazines and peers are likely sources of self marketing outlets.
The other important consideration is the timing of the sale so that income-tax considerations are taken into account for the buyer and the seller. An example may be if a capital gain is going to be afforded to the seller, the potential for the date of the sale might be prior to the end of the year. A buyer usually is unconcerned if a capital gain is to be received by the seller from the stand point of the timing of the closing. The reason is that the purchaser will normally have a 15-year period in which to write off that amount attributed to the capital gain for the dentist who is transitioning his or her practice.
Of course with a valuation being prepared for the purpose of a divorce, the dental CPA and the dentist’s attorney will become involved as the valuation may be headed for a judge and court room for its next step. There may be arbitration of some kind that could be involved as well where the valuation report for the purpose of the divorce will likely play a role. It may assist in the settlement of any distribution from the dental practice for help to the mediator or the court. The dental CPA will play an important role in either case. The testimony of the dental CPA supporting the theories behind the valuation amount will be critical to the finality of the case. This role is also when the dentist needs to borrow funds to pay the divorce proceeds after the adjudication of the distribution. The dental CPA should have the expertise to assist in the application to lenders for the borrowing needs of the dentist. The lender will typically use the valuation that was prepared for the purpose of the divorce to rely upon when determining how much can be lent with the collateral of the practice.
The practice valuation expert
With the importance of the valuation for either purpose of divorce or transition, it is a must to have a dental practice valuation expert who can support the methods reported in the valuation. The appraisal used for the divorce may cause a court room appearance. The transition valuation may need to be defended in the light of tax occurrences or allocations within it among the dental practice assets.
The key to the retention of a valuation expert is his or her experience with the dental profession. How many valuations has the expert prepared limited to dentistry? How often has the expert testified in court or assisted a tax attorney in guiding the allocation of the dental practice assets on the transition agreement? Look for CPA, CVA or some other designation for expertise in a courtroom or for assistance that the evaluator can give and that the dentist may rely upon for either of these important valuation events.