Valuing a closely-held medical practice during a divorce in Texas requires a complex understanding of the measures of value, methods of valuation, and Texas statutes. Although business valuations do not adhere to precise mathematical processes, general methods, procedures, and principles exist. In Texas, determining the value of medical practice is often a critical and hotly contested aspect of divorce proceedings. Understanding how a court will incorporate the value of medical practice to come to a “just and right” division of property is crucial to securing a favorable outcome in a divorce.
TEXAS ASSETS DURING A DIVORCE
Texas is a community property state, meaning only property created or accrued during the marriage is subject to division during a divorce. Community property may include real estate, businesses, medical practices, cars, money, and retirement accounts. Under the law, courts must make divisions that are “just and right.” It is important to note that “just and right” does not necessarily equate to a 50 percent division.
OWNERSHIP OF MEDICAL PRACTICE AFTER A DIVORCE
Medical practices fall under an important caveat of Texas’ property division laws. The Corporate Practice of Medicine (CPOM) doctrine prohibits non-physicians, entities, or corporations from practicing medicine. Thus, a court cannot divide the ownership of a medical practice to a non-physician spouse; instead, the court can only determine and divide the value of the practice.
MAIN APPROACHES TO VALUING A MEDICAL PRACTICE
Valuing the worth of medical practice is crucial to a just and right division of property. Valuation is usually determined by the parties to the divorce, an expert appraiser, or a judge. There are three primary approaches to value a medical practice.
Net Asset Approach: This approach focuses on the fair market value of the medical practice’s total assets minus its liabilities. There is often room for interpretation with deciding which of the practice’s assets and liabilities to include in the valuation. However, this approach is typically the easiest to apply.
Market Approach: The fair market approach compares the practice to transactions involving similar medical practices that have been sold. Issues often arise because of the economic fluctuations relative to what the parties believe their practice is worth.
Income Approach: The income approach evaluates the cash flow and projections of the medical practice. This approach usually involves a flat revenue percentage or a formula-based income approach.
As well as these three primary approaches, there are various other approaches that an expert or judge may use to determine the value of a Texas medical practice during a divorce.
GOODWILL IN VALUING A PHYSICIAN’S PRACTICE
In addition to the tangible valuation of medical practice, courts will often factor in “goodwill” into their final calculations. Goodwill refers to the societal value of the medical practice or physician’s services. This intangible measure of value often includes a subjective analysis of various factors. Some factors in considering the goodwill of a medical practice include the physician’s reputation, experience, specialization, and location. However, these “excess earnings” have no tangible value apart from the unique characterizations of a specific physician.
ARE YOU A PHYSICIAN ANTICIPATING DIVORCE?
Valuing a physician’s practice is a complex endeavor, and the parties should consult with an experienced attorney to avoid any potential pitfalls or unanticipated windfalls. Advance planning is crucial to securing a favorable, just and right property division. At the McClure Law Group, we routinely assist physicians and other professionals in valuing their practices and related businesses to ensure their interests are protected. To learn more, call the offices of McClure Law Group at 214.692.8200 to schedule a no-obligation consultation.