What Happens When Professionals Divorce
Professionals (including doctors, lawyers, dentists, CPA’s, architects, veterinarians, etc.) face complex property division when divorcing from their spouse. If you are a professional with your own practice or business, you might be worried about what happens to your business assets during an upcoming divorce or separation. If you are married to a professional with a practice, this might be the only real asset in the marriage and you are probably wondering whether you will have any rights to it. Usually a professional practice is the most valuable asset in a divorce settlement. This is why it is important to understand how they are characterized and valued during divorce in Texas and work with a knowledgeable attorney to make sure an agreement (or Court Order) is in your favor.
Character and valuation of professional practice (such as a pediatrics practice) is not logical anyone outside of the Texas divorce lawyer world. What seems like a very valuable and profitable practice may be worthless when it comes time to divorce. The opposite may be true too.
Therefore, don’t jump to conclusions about the value. To get a rough idea of the value of your practice ask this question: “What would happen to my practice if I died tomorrow?” If the answer is: “My practice would disappear in a week”, then your practice is probably worthless for divorce valuation purposes. If instead the business would just keep going (maybe even better) without you, then there is some value there.
What Happens to My Professional Practice during the Divorce?
Depending on certain factors, the value of your practice may have to be “divided” during your divorce. Your soon-to-be-ex-spouse is entitled to a portion of the value of the practice – not the practice itself.
It is understandable that the prospect of sharing the value of your practice is upsetting or frustrating to many. After all, you spent a lot of time, energy, and money investing in and building your practice. But in the same way, your spouse may have made direct or indirect contributions to the business and may be entitled to some of its value.
The first step in this process is to decide if the property in question is marital or separate. Next, the business is valued. Finally, the court decides how much the professional owner will pay the other spouse for their share of the value of the business.
Step One: Is the Property Marital or Separate?
During this phase, lawyers will determine what is included in the marital estate. They are looking to see what assets were accumulated during the marriage and need to then be divided during the divorce. Assets will be labeled as “community/marital” property or “separate” property, although sometimes they can be a mixture of both.
Separate property is that which you owned before the marriage, or were given as a gift or inherited. Marital property is anything you have acquired since the start of the marriage. A professional practice opened during the marriage is considered community property in Texas.
While characterizing the property may sound straightforward, there are many cases in which separate property can become marital property when used in support of the marriage. For example, even if you started your practice before getting married, if you continued to work there during the marriage, it will probably become marital property. There’s also the possibility that your practice accrued value during your marriage, in which case it can also become marital property. Your attorney will help you characterize the property as either community property, separate property, or a combination of both.
Step Two: What is the Value of the Business?
Determining the value of your business is a complicated matter, as you and your team will have to take both tangible and intangible factors into account to come up with a number. There are many different strategies used to do the valuation, but you will likely work with an expert who is certified in business valuation and/or appraisal.
One thing to keep in mind is the “goodwill” of your business. According to the International Glossary of Business Valuation Terms, goodwill is: “[t]hat intangible asset arising as a result of name, reputation, customer loyalty, location, products and similar factors not separately identified.”
Goodwill is the value the business has based on repeat customers, its reputation, its history, etc. Even though it’s intangible, goodwill can be transferred or sold.
There are two types of goodwill: professional/personal goodwill and practice/business goodwill. Professional goodwill is attached to the person who is the professional. It exists under the argument that if that person left the practice, his or her clients would follow wherever he or she goes. Meanwhile, business goodwill is attached to the business and reflects the argument that the customers would return to the business even if the ownership changes.
Key Point: Only Business Goodwill Counts
Any professional practice will likely have some amount of both professional and business goodwill. However, when it comes to divorce settlements, Texas law does not allow for the division of professional/personal goodwill – only business goodwill. In other words, no value is assigned to the goodwill assigned to the person.
A good example of this is a law firm called “Don J. Wilson & Associates” where Don Wilson is getting divorced. Assume he has 3 other lawyers working for him and brings in $2 million/year in revenue and $700,000 in profit for him. Let’s assume that everyone calling to retain his firm is doing so because they’ve heard great things about Don. In this case, there is zero business goodwill and a bunch of professional/personal goodwill. Therefore, this law practice probably will be worth very little for divorce and valuation purposes.
How Do You Determine Goodwill?
To determine if a business has goodwill beyond personal goodwill, a few factors may be examined:
- Does the business have a name for itself or is it named after a person?
- Does it have multiple employees or is the professional in question the only one?
- Does it contract directly with customers (versus contracting out work)?
- Does it have an established location?
The non-professional spouse might try to argue for more goodwill than is available to divide. Overall, goodwill is just one consideration during the complex process of business valuation.