Divorce and the financial toll on the dental practice

August 11, 2014

Article

What is the financial result when the goodwill intangible value is less than the tangible value of a dental practice? What spousal rights emanate from this type of dental practice valuation result?

Financially, the dental practice valuation used during divorce proceedings can mean the difference between thousands and thousands of dollars remaining with the dentist or being awarded to the spouse. The amount of the allocation of the tangible dental practice assets such as the equipment, furniture and fixtures, and technology are typically those assets that are available for sharing with the spouse. Even in states where equitable distribution rules are effective, a court still is interested in being fair and awarding the distribution of dental practice assets to the spouse most deserving of that award or dividing the value of those assets more in the favor of the non-dental spouse. These tangible assets are not normally those of the dentist, and not personally owned. The spouse who has contributed the most to the current value and to the maintenance of that value will weigh heavily on the court’s decision in the award that will be presented in the opinion of that judge. Since the tangible assets of the dental practice are owned by the enterprise on almost all occasions, there is little doubt that they are available for distribution. They are not typically allocated to the personal nonmarital assets of the dentist unless there is a separate business that may own and lease back those tangible assets to the dental practice. This type of situation is rarely seen. The intangible attributes of goodwill typically result in the more money from the dental practice valuation being awarded to the dentist when those goodwill attributes are allocated to the dentist’s personal goodwill rather than the goodwill of the enterprise, or dental practice, itself. What about a relatively new office with a lot of just acquired equipment, furnishings, and other tangible assets?

What occurs with a potential distribution of value based on a high tangible asset valuation?

The tangible assets are almost always the property of the enterprise, or the dental practice and not part of the personal assets of the dentist. These assets are available to have their monetary value divided between the spouse and the dentist in an equitable manner by the court. When a new practice is opened or when an existing practice has purchased state-of-the-art equipment and an interior looking like a “showcase,” these are then available for an award by the court since they are not personally owned by the dentist, but by the dental practice. There are rare occasions when the dentist may own these assets, such as when a lease is in effect between the dentist and his or practice for those assets when the dentist is the lessor and the dental practice is the lessee. The source of the funds used for the acquisition of the tangible assets is a prime indicator of who will get the distribution of the value of those assets. As an example, if the tangible assets were purchased with the capital of the dental practice, they are then available for distribution, since there would be no encumbrance on those assets. If loans were used for the acquisition of the tangible assets, the value of those assets would then be reduced by the unpaid portion of the loan prior to a distribution amount being awarded.

Tangible versus intangible asset value and awarding that amount

Those with experience in the dental world know that the intangible or goodwill value of the dental practice can account for up to 80% or possibly more of the dental practice value. The debate between personal goodwill and the enterprise or dental practice goodwill is a constant source of expert opinion. Of course the dentist wants as much goodwill as possible to be allocated to the personal side and as little as possible to the practice. With tangible assets, there is normally no ability to argue that they are part of the dentist’s personal assets. The dentist who is heavily invested in tax planning structures, estate planning, and in the use of asset protection devices may have formed another organization for the purpose of segregating the typical non-personal assets usually available for distribution in a divorce. If those tangible assets were owned by an entity other than the dental practice, the ability of a spouse to get their value in an equitable distribution would at least be more difficult.