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Valuing a Medical Practice During Divorce in Texas

Divorce is a complicated process, but having to value and divide a medical practice can make that process trying.

Whether you are a cardiologist, ophthalmologist, or general practitioner, building a successful, private practice takes significant time and energy. If you have been doing a medical practice for years or even decades, it's challenging to imagine giving up any of your practice's value to your soon-to-be former spouse.

However, your spouse will likely see it differently. Your spouse may have made direct or indirect contributions to your practice's success and feel entitled to his or her fair share.

Before a medical practice is divided, it is typically, but not always, valued. The dollar amount designating the worth of the practice will be determined. The value will factor in the assets, liabilities, and value of the practice's goodwill or reputation.

A more general overview of business valuation for divorce in Texas can also be found here.

When is Value Determined?

The first issue reached in valuing a medical practice is determining the date. Texas businesses are valued during the divorce of the parties.

This means that depending on how long a divorce goes on or if something should change the business's value, experts may have to reexamine its value during the divorce.

As such, any significant increases or decreases in the value of your medical practice since the date of separation will be considered in the ultimate valuation.

Is My Spouse Entitled to a Piece of My Medical Practice?

Unless you had a premarital agreement saying otherwise, and most people do not, your spouse almost always has an interest in your medical practice. Still, even though your spouse may have a share of the practice's value, they may not have the practice itself.

During the property division, the court must categorize, value, and divide all parties' marital assets. How much your spouse is entitled to will depend on how the property is characterized—separate or community—and how the court distributes the marital estate. How the court distributes marital assets can rely on a variety of factors.

Even when the court does award a large share of your medical practice's value to your spouse, the court will not force you to co-own your practice with your ex-spouse. The court could award you sole ownership of the practice and compensate your spouse by awarding a larger share of the other marital assets. Or you could be forced to buy out your spouse's interest in the business.

Buying out your spouse's interest in your private practice can be tricky if you do not have enough liquid assets readily available to do so. Consider a divorcing couple with very few marital assets other than the husband's thriving ophthalmology practice. If the husband does not have enough cash on hand to buy out his wife's share of his practice, he might have to liquidate assets or cash in some investments.

But generally, judges do not want to put you out of business. Most judges will not compel you to buy out your spouse immediately if it results in the practice failing. Instead, judges have broad discretion to structure payments. Your judge could order you to buy out your spouse over a term of months or even years and could place a lien on your property until that debt has been satisfied.

Who Determines the Value of the Medical Practice?

The value of your practice will be determined by one or more of these people in some combination:

  1. You and your spouse
  2. An expert business appraiser
  3. A judge

Can You and Your Spouse Agree on the Value?

Is there any possibility you and your spouse could agree on your medical practice's value and distribution? If so, it may be worth exploring whether you can negotiate your divorce outside of court.

Attorneys can assist you in negotiating and drafting a separation agreement. Most physicians succeed in negotiating a division of their practice without judicial intervention.

Still, it's challenging to reach an agreement without first getting a professional valuation. Most physicians are not regularly involved in buying or selling practices and lack information as to the value of these assets.

A Business Appraiser's Opinion

Hiring a business appraiser can be expensive, but usually, it is an essential expense. Your appraiser should be fair and impartial. He or she should have no ties to you, your spouse, or the medical practice.

Look for someone with credentials—a Certified Business Appraiser, Accredited Senior Appraiser, or a Certified Public Accountant. Ask if they have experience valuing medical practices. Typically, the retention of the appraiser is best handled by your attorney. Usually, each spouse retains their independent valuation expert.

Having an expert appraise your medical practice can facilitate an agreement or settlement out of court. But if you and your spouse cannot agree, try to look for an appraiser with litigation experience. Being good at evaluating the value of a business is a separate skillset from testifying as to the basis of that valuation.

The Judge's Ruling

If you and your spouse cannot agree on your private practice's value and distribution, then the decision will ultimately lie with the judge.

During litigation, the judge will hear evidence on the valuation of your practice. You will have your expert appraiser to serve as an expert witness, and your spouse will likely have hired his or her appraiser.

Making Your Case for The Judge

Generally, during litigation, each party will have their expert appraisers with values favorable to them. Your spouse's attorney will also cross-examine your expert, so it is important that your expert appraiser can handle the pressure of testifying in court.

But the judge will not necessarily just choose between your or your spouse's proposed values. For example, your expert appraiser might value your internal medicine practice at $500,000, while your spouse's appraiser thinks $700,000 is more accurate. Your judge could agree with your appraiser or your spouse's appraiser, or the judge could decide that your practice is worth $600,000, based on expert testimony and evidence. If your proposed value and your spouse's proposed value are wildly disparate, the judge's value will likely be somewhere in the middle.

If you want the judge to view your proposed value favorably, it should be fair to you but not so skewed in your favor to be unbelievable. If your expert's valuation seems low to you, the judge will probably think so too, and so will your spouse and their attorney.

A judge has the discretion to determine a business's value using different methods and considering many various factors. However the judge values your medical practice, he or she must identify which way was used and the factors that weighed on that decision.

How Medical Practices Are Valued

A variety of different methodologies can be used to value a medical practice. The value can also be affected by any of several subjective factors.

Methods of Business Valuation

1) Income-Based Approach

An income-based approach calculates the value of a physician's practice by looking at the practice's income. This can be done in one of two ways: using a formula to determine future income or using a flat percentage of income.

The first and most common method for valuing a medical practice for a Texas divorce is the formula-based income approach.

A formula-based income approach determines expected income by looking at the practice's cash flow patterns over the last few years and assessing the risk and return on investment.

Your practice's expected income will vary greatly depending on your specific operating procedures. For example, the anticipated revenue of a way that is a member of an Accountable Care Organization will differ significantly from a fee-for-service practice.

Your relationship with your third-party payers may also be relevant in determining expected income. Whether you accept Medicaid or Medicare may be applicable. Also, if your practice does not take plans from individual major insurance companies, for example, it could affect your expected income.

A business can also be valued using a flat percentage of gross income that would depend on the industry. However, this valuation works best for businesses with predictable long-term expenses and cash flow. Realistically, this is probably not the best option for valuing a private medical practice.

2) Fair Market Value

A medical practice's value can also be determined using the fair market value. But choosing a medical practice's fair market value is not as easy as it sounds.

Fair market value is the price a willing buyer would pay for the business on the market. But there is not generally a ready market for medical practices, so this can be difficult to determine. However, with the recent trend of hospitals buying up private practices, there well could be a market for yours or similar practices.

If any comparable practices have been sold lately, that could relate to the fair market value of your practice. A comparable practice would have the same or a similar specialty, of a similar size, and in the same or similar location as your practice.

3) Asset Approach

The asset approach to valuing a medical practice can be distilled down to the following formula:

ASSETS – LIABILITIES = PRACTICE VALUE

Unfortunately, implementing that formula can be tricky.

The practice's liabilities include debts, mortgages, and long-term fixed costs. The practice's assets, however, are not quite as easily ascertained.

Fixed Assets

Fixed assets are tangible, valuable things. Fixed assets include such items as medical supplies, furniture, and medical equipment, and machinery. Yes, your $600,000 MRI machine is a fixed asset! Still, expensive medical equipment may depreciate with age and use, and any money still owed on machinery should be counted as a liability. If you own the office building or property where your practice is located, that would be considered a fixed asset.

Other Assets

Aside from the fixed assets mentioned above, a medical practice also has intangible assets. Intangible assets could be several things but commonly include accounts receivable or the value of any work in progress. This includes pending payments from insurance companies or other third-party payers.

What About Goodwill Value?

Besides the ways mentioned above to calculate a practice's value, a practice will also likely have goodwill value.

Goodwill value is not an easy concept, but at its most basic, goodwill value is your medical practice's ability to earn returns over an average rate of return. Goodwill value can be affected by several factors. These factors could be specific to you, the practitioner, or they could apply to your practice more generally.

Methods of Valuation

There are multiple ways to determine a private practice's goodwill value. These methods range from objective to subjective.

1) Capitalization of Excess Earnings

This method for valuing goodwill is complicated, but basically, it measures the difference in how much your practice earns compared to an average, comparable approach.

The methodology for this approach consists of:

  1. Finding practice's average net income from the past few years
  2. Subtracting assets and a reasonable return on investment
  3. Comparing that with an average, comparable practice's earnings
  4. Multiplying the difference by a capitalization factor

A capitalization factor is a discount rate, meaning it attempts to give a present value to expected future income. The capitalization factor is industry-specific and varies depending on the practice you are valuing.

2) Sales of Comparable Practices

Looking at the sale of comparable practices is another way to determine a private practice's goodwill value. The court will look at sales of similar practices and then subtract your practice's net assets.

Again, a comparable practice would be similar in size, specialty, and location. Since there is not always a ready market for medical practices, it may be challenging to find an example of a comparable method recently sold.

3) Subjective Goodwill Factors

While the methods described above are objective measures for valuing goodwill, goodwill value can also be determined or affected by many subjective factors. These factors might be personal or practice-specific. These lists are but some of the myriad factors that might affect your practice's goodwill value.

Personal Goodwill Factors

These examples relate specifically to you, the practitioner:

  1. Age & health
  2. Education and specializations
  3. Reputation in the community
  4. Experience
  5. Personality and bedside manner

Age & Health

Goodwill value can be affected by your age and health. It matters whether you are just getting started or if you are in the twilight of your career.

Education & Specializations

If you went to a prestigious school or if you have certifications or specializations, your practice might be more valuable than others.

Reputation in the Community

Sometimes, professionals are known as the person to go to for a particular problem. If you are that go-to person, it could factor into your practice's goodwill value. And if you are from a prestigious or well-known family, that could affect you.

Experience

Patients value an experienced physician. Experienced physicians may have known their patients for a long time and are more likely to have a loyal patient base.

Personality & Bedside Manner

If your patients like you and your personality, they are more likely to be loyal to you.

Practice-Specific Goodwill Factors

These examples relate to your practice:

  1. Specialized Practice
  2. Location
  3. Potential for Growth
  4. Employees and Partners
  5. Payment Structure

Specialized Practice

Specific specializations may be more in-demand than others. For example, in a retirement town, a urology practice may be more valuable than a pediatric practice.

Location

A practice in a bustling urban area may have a higher goodwill value than a similar practice in a sleepy rural town.

Potential for Growth

A dynamic practice with growth potential may have a higher goodwill value than those winding down.

Employees and Partners

Your employees can also affect the practice's goodwill value. For example, you may be one of several physicians who own a stake. It may also matter if you have an extensive support staff.

Payment Structure

How your practice makes money can have a significant impact on its goodwill value. Goodwill values might vary depending on whether your practice bills on a fee-for-service or value-based model.

Your relationship with your third-party payers will also be meaningful, as will your patient base. For example, a practice with a wealthy patient base may have a higher goodwill value than one where most patients rely on public benefits.

Other Concerns

Here are more common scenarios and concerns that arise when a medical professional must value their practice for a Texas divorce.

My Spouse Worked at The Practice

If your spouse worked at your private practice, did you pay him or her a wage? During a divorce, it is advantageous to have paid your spouse a wage.

If your spouse worked without receiving compensation, it does not necessarily increase the value of the practice. Still, it does mean that your spouse has a good claim for having contributed significantly to the practice’s significance. This behavior usually is already factored into the Texas community property rule.

My Spouse Supported Me Through School

Similarly, if your spouse supported you during or paid your way through medical or professional school, this is already accounted for in the Texas community property rule.

What About My Medical License?

While your private practice can be considered a marital asset, your medical license is separate property. The value of your medical license will not be valued and distributed during divorce.

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