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Valuing a Professional Practice in Tennessee Divorce

Jan. 22, 2020

When professionals like doctors, lawyers, and accountants who are shareholders and/or partners of a professional practice are involved in divorce proceedings, the practice they are part of must be evaluated to determine its value as part of the marital estate.

If you are going through a divorce proceeding, no matter how familiar you may be with the legal system, you will benefit from our help with your case, especially because this is an emotionally difficult time for you and your main focus is on your family and your own well-being.

The Law Office of Shannon A. Jones has extensive experience handling high-asset divorce cases. We can assist with financial and legal planning that addresses your particular circumstances, and we will aggressively investigate all the assets in the marriage, including retirement accounts, investment accounts, business ownership interests, personal assets like jewelry, artwork, or vehicles, and total net worth so that every dollar in the marriage is accounted for.

Call the Law Office of Shannon A. Jones today at (901) 390-9041 or visit us at our website to schedule a confidential consultation to discuss the specifics of your situation today.

Challenges In Valuing A Professional Practice

When a professional practice is being valued, the first thing that must be determined is the standard of value. Common standards of value include:

  • Fair Market Value – the price that a willing buyer would pay to purchase the asset on the open market from a willing seller.

  • Liquidation Value – the amount the owner would receive if they were forced to sell the asset on the date of valuation.

  • Going Concern Value – a group of standards that looks at the value of the business as a functioning enterprise. Going concern value rejects book value and liquidation value standards.

  • Book Value – the value arrived at by adding up all assets and deducting all liabilities.

  • Original Cost – the purchase cost or startup cost of a business. Not considered appropriate for valuation of a business because the value of the business will likely have increased since its assets were first acquired.

Another important aspect in the valuation of a practice is goodwill. Goodwill is the favor or advantage a business has acquired through its brands and reputation. The price of a business on the open market minus the value of the tangible assets is one way to measure the goodwill of that business. If the business is easy to sell on the open market, then this goodwill is considered realizable.

It is more difficult to measure if the goodwill is unrealizable, that is, the business is not easily sold. This is often the case when the business is the practice of a doctor, lawyer, or other professional, where the personal reputation of the owner spouse can’t be separated from the reputation of their practice.

In other words, if the professional retires or dies, the practice ends and no longer has any value. Tennessee courts have ruled that unrealizable goodwill doesn’t have a monetary value attached to it and, therefore, it can’t be included or divided as an asset during divorce proceedings.

Options and Solutions

One of the most important steps in the valuation of a practice in divorce is planning. You may have already considered the consequences of getting a divorce when you set up your practice. You may have a prenuptial agreement with your spouse or you’ve already planned for tax and professional liability considerations in the event of the dissolution of your marriage.

However, if you have not taken any of these steps in advance, it is important to remain calm. Do not manipulate assets or take other steps that a court may consider “dissipation of marital assets.” It is important to operate your practice as normally as possible without regard to your impending divorce.

It is usually necessary to hire a well-qualified valuation expert who can expertly make the case for their valuation of your practice to the court. This person may be a Certified Business Appraiser (CBA) or Accredited Senior Appraiser (ASA).

At The Law Office of Shannon A. Jones, we work with financial experts who perform comprehensive research into the value of all assets in a practice, including accounts receivable, retirement accounts such as IRAs and 401(k)s, and contingency fees for work performed during the marriage.

Mediation can be a beneficial step practice valuation in a divorce proceeding. While some people view it as a waste of time, research shows that more than 60% of cases that are mediated either settle during the mediation process or before going to trial. Further, any agreements that both spouses can come to regarding the division of assets make the entire process easier for everyone.

Frequently Asked Questions About Professional Valuations

Will The Court Divide My or My Spouse’s Professional Practice, So That We Are Both Owners (or Shareholders, or Partners)?

No. Tennessee statutes prevent a non-professional from having an ownership share in a professional practice. Furthermore, this would keep your financial life entangled with your spouse, which defeats the purpose of a divorce. More likely, the court will award the owning spouse ownership of the practice and then order the owning spouse to pay the non-owning spouse an amount equal to the non-owning spouse’s share.

What Is The Importance of Debt in The Valuation of A Business?

In some circumstances, the debt a business holds may be more important than the value of the business. If a spouse has pledged personal assets as security for a business’ debt, the other spouse needs to determine the total amount of debt and make sure they are not held liable for that debt.

In a Valuation of A Professional Practice in Tennessee, What Records Are Open to Discovery?

All financial records of the practice are open to scrutiny in a divorce. This does not include medical records or confidential patient information, since these are protected by state statutes and federal rules under the Health Insurance Portability and Accountability Act (HIPAA).

Call the Law Office of Shannon A. Jones For Help with Professional Practice Valuation

We understand that this is a stressful time for you. Not only are you facing a major change in your life, but you are also operating a business or private practice and must offer the same high-quality service that your patients or clients expect from you.

Most importantly, your family needs all the attention you can devote to them. Our professional team of divorce attorneys is here to help you through this entire process, fighting for you no matter how difficult or contentious the process becomes. Please contact our office today at 901-390-9041 or reach out to us online to schedule time to sit down with us and discuss your legal options.