What to Know About Dental Practice Valuations During Divorce Proceedings

What to Know About Dental Practice Valuations During Divorce Proceedings | Image Credit: © alex - stock.adobe.com

For dentists involved with divorce proceedings, the first question asked of an evaluator often involves what the cost of the dental practice valuation will be.

This may be better off asked at the end of the interview with the evaluator. Finding out about the evaluator’s credentials, experience, expertise in the court room and the number of times dental practice valuations have been prepared may be better questions to ask at the outset prior to getting to the cost of the valuation.

As most people realize, price can be misleading. A low price for the preparation of the valuation may be because the evaluator does not have the experience necessary to present the practice in an independent format so that the judge or mediator will not laugh him or her out of the room. The evaluator should not be an advocate for the dentist. That is the job of the attorney.

The evaluator’s job is to present the dental practice in such a way as to maintain his or her independence and not be led by the dental client or the client’s lawyer. Just like the dentist wants the best dental CPA for his or her business services, the best evaluator of the dental practice will present a sometimes financially life-changing report that will dominate one with facts that is prepared at a lesser cost.

Is price the object or is the best evaluator the object?

Price is certainly an important consideration when determining which evaluator to choose but it should not be the sole criteria for determining who is chosen to prepare the valuation. The dentist and his or her spouse will probably both retain attorneys. They will be advocating exclusively for their client. They will also be relying on the valuation prepared by the independent evaluator.

The lawyer’s proof when making his or her presentation about the value of the dental practice will be swayed by the supporting documents in his or her possession. The valuation report should be the most important document that the attorney is relying upon to support the dentist’s case about the value of the dental practice. If the spouse is getting an evaluator with the expertise needed who understands what is required from him or her, the lack of the best evaluator because of the cheapest price will hurt the dentist probably to the extent of hundreds of thousands of dollars over the long term.

It is analogous to the use of a computer and the results obtained when someone in the know remarks, “junk in, junk out.” When the valuations are exchanged for their critique during discovery, the dentist’s attorney may be surprised by the inclusions in the spouse’s expert’s valuation compared to what is in place for reliance by the dentist’s own attorney. You can also be assured that the dentist’s attorney is not hedging on legal fees while the case is ongoing.

What credentials should be assessed when determining the choice of dental practice evaluator?

Since it is rare for an attorney to know a great deal about dental practices, and even more unusual for the lawyer to admit a lack of knowledge, relying on the dental CPA is probably the place to start the search or dialogue regarding which evaluator should be retained. Hiring a CPA for the dental practice who does not have any dental clients is probably a bad decision.

Once the dental CPA is engaged, the dentist should easily see the difference between the general-type CPA and the dental CPA based on experience, advice about percentages of costs compared to gross revenue, and knowledge of appropriate dental practice evaluators as well. The dental CPA will have knowledge of evaluators to interview probably well in excess of the attorney’s knowledge as experience creates wisdom as well as the ability to have more contacts in a particular field of endeavor.

Some of the interview process should include but not be limited to the following questions: How many dental practices valuations have you completed? How often have you testified in court? What is the number of mediations or settlement conferences that you have attended? How about attendance at depositions? Have you ever worked in the geographic area in which the dental practice is located?

Since cost is a question, what are the additional costs for attending the mediations, settlement conferences and trial if necessary? The dentist and the lawyer do not want to have any surprises. What information is needed to be provided to the evaluator and what is the estimated time of completion of the valuation once the information is presented to the evaluator?

Are there other reports besides the valuation that are important?

There are only about 10 states that are not what is known as “equitable distribution states.” That means that at least 40 states do use the method of “equitable distribution,” to determine the amount to be distributed from an asset value to the spouse and to the dentist. Equitable does not mean equal. Many feel that it does mean a 50% division of the assets including the dental office. That is not true.

There are numerous factors that are presented in a report that many evaluators do not prepare to assist a court or mediator in determining what amount the dentist and the spouse are to receive. The most important factor in these 40+ states for the dentist is the amount of personal goodwill that is attributed to him or her. Those evaluators who do not prepare an allocation of goodwill are hurting the dentist and attorney for the dentist with the presentation of the case.

It is rare to find a court where the judge is not an attorney. Since most lawyers have had little experience with dentists, the judge will also need assistance in determining what the presentation means. When the evaluator of the dental practice includes an allocation of the goodwill between the personal and enterprise ratios, the judge and the dentist’s attorney will be greatly helped in being able to decide to render an opinion of the distribution of the value that he or she determined. Some of the criteria for assisting the court and the dentist’s attorney are found in the Multi Attribute Utility Method, commonly known as MUM. This discourse highlights many of the attributes used to determine how much is personal goodwill, which is not a marital asset, and how much is enterprise goodwill, which is a marital asset.

Examples are how much is produced by the dentist compared to other producers in the office such as hygienists? Where is the location of the office and how important is that for patients to access easily? What information is included on the website? What is the work ethic and health of the dentist? What type of marketing is being used? There are many other attributes to be included under the MUM method. Each of these gets a weight which is used for assisting the court in decision making about the distribution to each party.

Suppose the spouse’s evaluator understands and includes this report in addition to the valuation and the dentist’s evaluator does not? The judge and the attorney for the spouse will have a tremendous advantage over the more cheaply priced evaluator chosen by the dentist based solely on the price of the dental practice valuation.