If you or your spouse are physicians who own a medical practice, then the division of that medical practice may become an issue in your divorce. In today's blog post from the Law Office of Bryan Fagan, we are going to discuss the topic of valuing a medical practice and the factors that go into valuing a medical practice. This is an important topic that can greatly impact how your divorce case turns out. There are so many moving pieces to consider that it pays to be as prepared as you can be.
Buying into an existing medical practice or creating a medical practice is a crucial decision to make for a doctor. The financial security of the doctor can be impacted by the decision to start a business. The type of care that the doctor can provide can also be impacted by the decision to open up or buy into an existing medical practice. This may end up being the most significant financial transaction that you or your spouse enter during your life. With that backdrop, you need to be aware of how your business may be valued and what you can do to prepare to have your business divided in a divorce.
Doctors like yourself must practice medicine with the best interests of patients in mind. The ability to make money by practicing medicine is a secondary result of being a good doctor and doing right by your patients. However, when it comes to that business being valued in a divorce scenario it makes sense to put your best foot forward and be as prepared as possible. This does not mean that you value money more than you do the well-being of your patients. However, you would be doing yourself a disservice by not being prepared when it comes to figuring out how your business will be valued and what component pieces go into that valuation.
What makes the sale of medical practice such a good set-up for both buyer and seller is that the business likely has a history of being profitable. Medical practices have been for generations one of the best ways for a physician to parlay their talents, training, and skill into a way to serve others and make good money in the process. When it comes time for a doctor to consider selling a property the value of the property is one consideration for a potential buyer to investigate. Learning how medical practices are valued in a situation like this is critical both if you will be selling your practice or even if you will be needing to buy your spouse out of any community property share in the business.
What are the parts of valuing a medical practice?
As we just mentioned, there are several different factors to consider when it comes to valuing a medical practice. A few of these different factors that you would need to think about are how you receive referrals, your age, the type of medical practice you own, and the economic atmosphere of your community. A buyer will be interested in cash flow when purchasing a medical practice. Another consideration, if you will be selling your practice, is the cost of replacing you as a physician as well as the goodwill associated with you being a part of the business.
What is the fair market value for your business?
Determining the fair market value for a medical practice can be a challenge since the market is hard to define. When a person sells a home there is a clearly defined housing market for the seller and the buyer to tap into. In an area like Houston, there are several comparable homes to yours. There are many willing buyers and sellers. This is a market that makes it relatively simple to determine an approximate value for a home. There is almost always some haggling over the details but in general, you know what your house is worth. Putting the house up for sale and then closing on the house rarely takes longer than six months in southeast Texas.
This is not necessarily the case when it comes to finding a buyer for your business. As I am sure that you could imagine there are many fewer buyers/sellers of medical practices than there are buyers/sellers of homes. This will make it more difficult to find a value to the home and then it will make it more difficult to find a buyer. Another difficulty that you will encounter is that there are no business appraisers around every corner like there are home appraisers. It is a much more specialized field to find yourself needing to have the value of your business. As a result, you will need to be more intentional with how you approach this subject as far as valuing the business is concerned.
There are so many different factors in play when it comes to valuing a medical practice that you and another doctor who practices in the same area that you do may not receive the same amount of money for a medical practice. If you plan on selling the business, then the buyer is going to want to see that you have been operating a profitable and efficient operation. In this way, it can be difficult for a doctor to wrap their head around this. This is especially true if you have another person handle the finances of your business (such as your spouse) while you handle the patient interactions and other aspects of the practice.
Your medical practice needs to be profitable. How you treat patients is important to how well you practice medicine. However, when you get right down to it the way that your clients are treated may not be immediately discernable when determining the value of a business. Rather, the books are the black-and-white proof of how well your business functions. Hiccups with how you turn patient interactions into profit matters. If you are having a great deal of lag time in getting reimbursed through insurance for patient procedures or appointments, then this is another issue that you will need to come to grips with before moving on.
When you and your attorney begin to prepare a valuation of your medical practice for divorce negotiations it will be a combination of cold, hard facts as well as less objective factors. We have covered how the books of your business are going to be thrown open for an appraiser, broker, or another expert to determine value and cash flow. However, there are other considerations like the goodwill associated with your name and that of your business in the community which will also be important.
The value that you can wrap your arms around relates to things like the building which houses your practice (if you own the business), your medical equipment, furniture, and things of this nature. There are other things like bank accounts and insurance that count towards the value of your business. On the other hand, debt, payroll, loans, and any other costs associated with operating a medical practice will also be considered by an appraiser or business valuation expert. The amount of money that you take in will also be compared to the amount of money that you will for patient services. If you have a long lag time between bills and payment or frequently run into issues with being paid for the services that you provide, then this will negatively impact the value of your medical practice.
What is goodwill?
When people go through a divorce and need to figure out the value of a business, probably the most debated topic in the entire analysis has to do with how to value goodwill. Goodwill is how your business is thought of in your community. Your community is both the medical community and the area that you live and practice in. If you are thought of as a go-to doctor for your specialty, then that is a point in your favor when determining the value of your business. If you are a family care doctor or pediatrician and you are trusted by moms and dads, then this is a point in your favor. All these things make you a good doctor held in high esteem. However, the difficult part of this is figuring out how the value of your business can be impacted by the goodwill that you have in your community.
Who does the purchasing of businesses in your area matters? If it is other doctors who want to expand their practice, then your goodwill makes a big difference in the overall value of the business. However, if it is hospitals or investors who purchase medical practices in your area then those groups care much less about goodwill. Those folks are more likely to care about profitability first and foremost in addition to making sure that there are enough doctors to perform the necessary services in your practice area. If a hospital is purchasing your surgical practice, then they will be mostly concerned with having enough surgeons on board to perform surgeries, for example.
Considerations when divorcing as a doctor
A doctor needs to be aware of the different issues that are unique to your situation compared to most people who are getting divorced in Texas. First, you will need to focus on your student loan debt when dividing up your community estate. You incurred the debt to go to school and that debt will stick with you after the divorce. There is almost no way that a family court judge would divide part of that debt to go with your spouse after the divorce comes to an end. Some debts may be divided in a divorce, but your student loans are likely to stay with you.
Next, we can consider issues having to do with property division. Texas is a community property state which means that the property that you own is divisible if it was acquired during your marriage. It doesn’t matter if you earn a much greater income than your spouse or if your spouse does not earn an income at all. Rather, you need to be able to prepare for your property to be divided up between you and your spouse. Considering your future income earning potential, your education, and career prospects your spouse may be in line to receive much more than half of the community property.
Spousal maintenance is another factor to consider when divorcing. Hopefully, you and your spouse are in a situation where enough community property can be divided to go with your spouse that spousal maintenance is not necessary, Spousal maintenance is a type of spousal support that is paid by one spouse to another to help the receiving spouse pay for their minimum, basic needs after a divorce. Judges are unlikely to award spousal maintenance when there is sufficient community property to be divided that can be sold or otherwise used to pay for bills while your spouse figures out a long-term solution for income. It is not likely that your spouse will be able to not work and instead receive spousal maintenance from you for an indefinite period.
However, if you and your spouse agree to contractual alimony in your divorce negotiations then you can set the rules for how long and for how much support will be paid for. There are no amount, duration, or other limitations on contractual alimony. You need to be careful with how you treat contractual alimony in your divorce. If your spouse is asking for a lot of financial help after the divorce you should be wary of what you agree to. This is especially true considering that there are limits as to how much a judge can order you to pay in spousal maintenance based on the length of your marriage and the amount of money that you earn. Spousal maintenance is not designed to help your spouse live a certain lifestyle but rather to help him or her meet their minimal, basic needs.
Another set of factors to consider when it comes to divorcing as a doctor has to do with your minor children. When you go through a divorce as a doctor then your children will be impacted by the divorce, as well. Your kids are going to have to adjust to living in two different households. As you prepare for the divorce you should start to think more about how your case is going to be impacted by the decisions that are made regarding issues like child custody, conservatorship, visitation, and child support.
Child custody comes down to how much have you been involved in the lives of your children to this point. This is the only way that you and your spouse can negotiate on these issues or how a judge can assign parental rights and duties. The more involved you have been in the lives of your children then the more likely you will be able to ask to become the primary conservator of the children. Many times, fathers come into a divorce with the belief that mothers are preferred in conservatorship and custody situations. The reality of the situation is that mothers more frequently play the role of primary caretaker and as a result are assigned that role more often in a divorce.
As a doctor, you need to consider your schedule and responsibilities to patients when you are working to be assigned conservatorship rights. First, you and your spouse can negotiate on these subjects before it ever comes time for a judge to make decisions for you. You and your spouse know the needs of your family better than anyone even if you are not seeing eye to eye on much now. As a result, you are better situated to make decisions and to work through these issues than a family court judge. If you will be making changes to your work schedule to allow you to be home more often for your children, then that is something that you need to discuss and work through with your spouse.
You have a lot on your plate during a divorce. Not only do you have the daily updates and changes that will be a part of life during the divorce, but you also need to focus on your medical practice and treating your patients. A good family law attorney will be able to help you manage those changes, educate you on the important areas of your case and life and then allow you to make decisions that are in your best interests and those of your children.
Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan
If you have any questions about the material contained in today's blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free-of-charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of Texas family law as well as how your family may be impacted by the filing of a divorce or child custody case.