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    Why divorce makes selling practices so complicated

    When going through a divorce and a practice valuation, there are a host of issues to contend with.

    There are evaluators who merely prepare the same type of dental practice valuation for any purpose. This is not a good idea because a dental practice valuation prepared for something in particular is almost always different than that prepared for another use.

    There are many examples that can be given. One that is cause for concern — because of the financial effect on the dentist as well as the emotional drain — is asking whether the dental practice valuation prepared for the purpose of a divorce.

    Related article: Why hiring the right experts is critical during divorce proceedings

    In a conventional appraisal of a dentist’s office, the major area of value is the goodwill that has been created and that the dentist is selling. This asset has a significant tax benefit to the seller of the practice and the amount allocated to it is normally debated between the buyer and the seller so that the seller gets as much of an allocation as possible on the settlement sheet or in the sales agreement. Let’s look at what the difference between a valuation for a transition and for a divorce looks like.

    Compare/contrast

    Why should goodwill be the main asset analyzed in the presentation of a dental practice involved in divorce litigation? Why is it so emotionally and financially different than what is involved in the goodwill analysis during a practice transition? Why should the valuation purpose be so extraordinarily different when comparing the divorce valuation to the transition valuation when goodwill is the asset being analyzed?

    DivorceThe transition valuation of a dental practice is typically prepared in order to present the fair market value of a dental practice when both a “buyer and seller are hypothetical, aware of dental practices in general and are under no duress or compulsion to sell or to buy.” This is an indirect quote used in almost every dental practice valuation to identify buyers and sellers.

    The goodwill of the dental practice or the dentist may or may not be of critical impact to complete the transition.

    Negotiations almost always occur between the buyer and the seller’s advisors to obtain the most favorable tax treatment. During a divorce, there is an emotional component that becomes a factual piece of the entire proceeding of the separation of spouses. The idea of the goodwill being owned by the practice or by the individual dentist is of paramount concern when the preparation of the valuation is for the purpose of a divorce and not for a transition, estate plan or any other purpose that the dental practice evaluator has been retained.

    The importance of goodwill

    The difference between the dentist’s personal goodwill and this intangible value of the dental practice itself, or the enterprise, determines what is considered marital property and what is owned by the dentist individually and is not part of the estate to be divided. One can imagine the difference if, as an example, the total goodwill of the practice was agreed upon hypothetically at $500,000 and that amount was either deemed as personal goodwill or practice goodwill.

    Related article: What effect does divorce have on dental practice values?

    Let’s examine the difference in terms of the distribution awarded by a court in each of these extreme instances. Let’s also understand that there is rarely a situation where goodwill is an all-or-nothing extreme in the valuation of goodwill.

    Bruce Bryen, CPA, CVA
    Bruce Bryen is a certified public accountant with over 40 years of experience and is a part of RKG Tax & Business Services LLP, an ...

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