In divorce cases involving professional practices, property division can become one of the most challenging aspects. If you are considering divorce and have a professional practice, you need to be aware that there are added complexities in valuing and dividing professional assets that can affect your divorce settlement. Fortunately, these challenges can be effectively handled by skilled attorneys.
As one of Houston’s most highly regarded family law practices, Hendershot, Cannon, Martin & Hisey, P.C. is equipped with the experience and resources to tackle the division of professional practices. Our award-winning attorneys represent physicians, doctors, dentists, CPAs, lawyers and other professionals who own and operate their own practice, or who have an ownership share in a partnership or other professional entity.
Depending on the situation, the value of your practice may be subject to property division during divorce. Under Texas law, that means your spouse would be entitled to a portion of the value of your practice, not the practice itself.
There are several things to consider when determining whether your spouse has rights to your professional practice:
- Not all practices have value - Not all practices have value when it comes to divorce, particularly if a practice would quickly end if a professional were to “disappear.” If a business would persist even without the professional (a legal concept known as goodwill), it would carry more value in terms of a divorce. By reviewing the unique facts of your case, our legal team can help determine if your spouse has rights to your practice and what value the practice has.
- Ownership of a practice cannot be split – As a practical matter, a professional practice itself cannot usually be divided during divorce because non-professional spouses cannot split physical ownership of a practice in and area in which there are not licensed. For example, Texas has adopted statutory laws regarding the prohibition of corporate practice of medicine (which includes the prohibition of corporate practice of dentistry). These laws prohibit non-licensed persons (such as a non-professional spouse) from employing physicians to practice medicine and from splitting professional fees with licensed medical providers. This is why Texas divides the value of the practice.
- Buy-outs – Because the value of a practice is subject to division, many divorce cases involving a professional practice will may require a licensed professional to buy out the non-professional spouse’s community property interest. Non-professional spouses can come to agreements with a professional spouse regarding a fair buy-out price or use contractual alimony to address the issue.
- Disproportionate share of assets –Texas law calls for the “just and right division” of community property during divorce, and accordingly, there are instances when allocating a disproportionate share of assets to one spouse is justified. This may be the case when a professional degree or licensed is obtained during a marriage. Although degrees and licenses are not considered community property, a spouse who contributed to the other’s acquisition of the license may be entitled to compensation in the form of alimony and / or a disproportionate share of the assets.
How a Professional Practice is Divided During Divorce
Community Property / Separate Property
Determining whether a practice is divisible in divorce begins with determining whether it is considered community property. Because Texas is a community property state, assets earned during the course of a marriage are subject to property division during divorce. If a professional practice was started during a marriage, it is presumed to be community property. In order to overcome this presumption, clear and convincing evidence must be provided as to why it should be considered separate property.
Although separate property is what you owned prior to a marriage, or what you own as a result of an inheritance or gift. Income received from a separate property business is considered community property.
Determining the value of a business, or how much value a business opened before a marriage accrued during the marriage (appreciation), is a critical part of dividing assets. It can also be a complex matter that introduces particular challenges dependent on the nature of the practice and ownership structure.
Business valuation requires a calculation of both tangible and intangible factors. For example, the value of a practice includes tangible assets such as the actual physical property it owns (i.e. furniture, medical equipment, real property). It can also include intangible assets such as existing patients for medical or dental practices, intellectual property (copyrights, trademarks, patents, etc.), financial assets such as accounts receivable and contingent fees, and goodwill.
One important factor in business valuation is the goodwill of your practice, or the value of a practice based on intangible factors such as referral business, reputation, and legacy. Both the practice itself and the licensed professional have goodwill (commercial goodwill and personal goodwill). For the purposes of property division, Texas only recognizes the goodwill attached to a practice, which can be illustrated by customers who continue business with a practice even if ownership were to change.
Determining commercial goodwill beyond goodwill attached to the professional or their license is an essential part of the valuation process, and it centers on questions that ask whether the practice has its own name or uses the name of the professional, employs multiple people, contracts directly with customers, and has an established location.
The value of goodwill depends entirely on individual facts. For example, the value of a practice owned by a solo practitioner would have little to no business goodwill because that goodwill is inherently tied to the professional, their name, and their personal reputation. If a professional is part of a partnership or other entity, their interest may carry a value of the entity’s goodwill.
In many cases, division of a professional practice is resolved through a buy-out of the non-professional spouse’s interest in the value of the practice. Because every case is unique, an accurate assessment of what can be expected when it comes to dividing a professional practice can only be made after reviewing the individual facts of your case and the value of your practice. In majority of divorce cases, a third-party expert will be retained to determine the value of your practice.
Divorce involving a professional practice demands the attention of skilled and experienced attorneys. At Hendershot, Cannon & Hisey, P.C., our legal team has drawn from over 150 years of combined experience to help professionals understand their rights and protect their interests. This includes measurable success in properly assessing the value of a practice, calculating goodwill, distinguishing intangible assets, challenging valuations and arguments from opposing parties, dynamic negotiation of settlement agreements, and zealous litigation.
If you wish to discuss divorce, property division, and issues involving a professional practice, we encourage you to speak with a Houston divorce lawyer from our firm. Call (713) 909-7323 to request a consultation.