Most Critical Financial Step in Physician Divorce: Evaluating the Practice

One important rule to remember is that in many jurisdictions a non-physician cannot own a practice or employ a physician.

The most critical single financial issue to consider when a physician is getting divorced is, of course, the value of the practice as a financial asset. Most dentists belong to a partnership or group practice these days. A knowledgeable family law attorney will ask the following key questions to get the evaluation process started:

What kind of entity is the group practice?

When was it established? Before or during the marriage?

How was it funded?

Was stock issued to the participants?

Is there a buy/sell agreement?

Is there any future vesting of ownership/stock the participant could be entitled to after the divorce is final if the participant acquired such a right during the marriage?

All of these factors should be carefully examined because they affect the value of the practice. A qualified forensic accountant, with experience in assessing the value of practices specifically, will examine tangible and financial assets, accounts receivable, office equipment, furniture and the office lease and, of course, that intangible asset called “goodwill.” There will also be liabilities to consider, including insurance costs, taxes due, contributions to retirement plans and loans. Where is the practice located and how profitable has it been?

An able accountant will also want to make sure that the divorcing partner has been getting his or her fair share of income from the practice that is equivalent to what the other partners are receiving. An effort to misrepresent his or her income or to deliberately suppress his/her income with a divorce in mind could be considered fraud. The divorcing physician may also be required to notify his or her partners of the impending event, because the divorce could become their legal problem as well.

One important rule to remember is that in many jurisdictions a non-physician cannot own a practice or employ a physician. Thus a spouse who is not a physician cannot under any circumstances take over a share of the practice as part of a divorce settlement and become an “owner.” The parties have to arrive at a financial settlement based on the value of the practice, or it will be left up to the court to decide for both parties. Some dentists also include in their practice agreements a stipulation that if the marriage of one of the partners or participants is dissolved, all of that member’s stock in the practice is forfeited. (It may be possible for the dentist to buy back into the practice once the divorce is completed, which may trigger yet another opportunity for the non-medical spouse to cry “foul.”)

Quite often the entire issue of evaluating the practice will come down to a “battle of the experts.” One spouse’s expert may represent the value of the practice very differently from the other spouse’s expert. A knowledgeable and experienced attorney will never accept the other side’s “expert” report at face value, and could effectively disqualify the expert if he/she is unable to withstand a challenge to his/her methodologies in court.

What kind of credentials and experience does the opposing side’s forensic accountant have that entitles him or her to testify accurately as to the value of the estate? Does this assessment of the value of the practice deviate from the norm in significant ways? How are these deviations justified? Thousands of dollars can be lost because a spouse’s so-called “expert” was never challenged or never challenged effectively.

Evaluating an individual physician’s share in a practice properly during a divorce could be one of the most significant financial events of his or her life. It's essential that he or she choose an attorney with substantial experience in the process who knows how to challenge the other party’s financial expert.

This article was written by Douglas R. York, an attorney based in Houston with 17 years’ experience in marriage dissolution, including multi-jurisdictional divorces involving highly complex legal issues.

Douglas R. York is a licensed attorney in the State of Texas, and by this article, no advice is intended to be given and no attorney-client relationship is formed. The reader should check the laws of his/her state and seek legal advice from counsel of his/her choosing.