5 things you need to know about divorce, goodwill and dental practice valuation
Knowing about goodwill and the necessary attributes for the dentist's practice valuation can be critical in a divorce.
What is goodwill and how important is it when preparing a practice valuation for the purpose of divorce?
A quick paraphrase summary of goodwill is as follows: It is that intangible asset that provides the cash flow to the dental practice creating the revenue stream used to provide the net income and value for the owner and dental practice. It typically comprises a large amount of the value of a dental practice.
What descriptions should be included?
Testimony given at divorce trials, in front of the Internal Revenue in tax court and during negotiations for a transition all provide the insight into what attributes should be included in the goodwill narrative. When the dental practice valuation and the allocation to goodwill have come under attack by advisors to the dentist, those with experience in providing a detailed list of those areas of definition prove invaluable in prevailing with one’s case. Enumerating every point regarding the goodwill categories give an excellent description of what attributes are part of the goodwill apportionment. The support included in determining the value attributed to goodwill and then the resultant personal versus enterprise variances assist in convincing a judge or anyone else why the goodwill value is as presented. The personal goodwill compared to the enterprise, or practice goodwill is extremely important in states where equitable distribution is in effect.
What are some of the attributes of goodwill?
When assessing the value of goodwill and then dividing that amount between the dental practice and the personal goodwill, interviewing the personnel in the office(s) including the dentist, is a good starting position. Learning about the dentist’s work ethic, health, personality, age, education and the ability to manage the office staff and interaction with patients is essential. All of these items assist with the composition of the goodwill that is personal to the dentist or available for the spouse in an equitable distribution state. The office location, name of the practice, state of art of the equipment and the comfort of the office are also important items in determining the goodwill value. Comparing the rental paid to the area in which the office is located also assists in the valuation process and in defining what the value of the dental practice is.
Sometime an inexperienced CPA will inflate certain attributes to reduce taxes. When preparing a dental practice valuation, those inflated categories should be added back to income to normalize the net profit of the practice. When overpaying rent, as an example, to an owner of the dental practice who owns the building, a good evaluator would normalize the income of the practice by adding back the differential between market rent and the overstated rental so the net dental practice value would increase. Explanations regarding tax consequences, like the rental not being subject to payroll tax, do not mean it is correct from a business valuation perspective.
Continue to page two for more...