There Can Be Surprise Numbers in a Dental Practice Valuation Involving Divorce

When requested to prepare a dental practice valuation for the purpose of a divorce, the independent CPA CVA will do what he or she always does, which is to report on the facts given to him or her and to author a report that is independent and accurate. Sometimes the dental client who is going through the divorce and who has retained the evaluator wants to see something that purports to be a low value for a dental practice that has high earnings, valuable equipment and a lot of goodwill.

The evaluator will have explained to the dentist that has retained him or her that the valuation will be prepared so that it is correct and it won’t be changed to provide a cover for the dentist in hiding the actual value of the dental practice. In many cases, the dental client has a practice valuation that presents a number that is much higher than expected. What does the expert evaluator do when that occurs? There are very few things to do except to give a complete explanation of the valuation and to point out where the amounts that are being reported cannot be lowered.

The Explanation and the Response
The evaluator will have a fairly easy time explaining the valuation since it was recently prepared based on information the dental client gave to the evaluator. When the dentist had been earning substantial sums over the years, they can’t be changed to present something that did not happen. The dentist should be asked what he or she would have done and how the amounts that were received by the evaluator could have been changed in any way.

It will be difficult for the dental client to respond with something that a mediator or court will interpret as being in any way accurate. It is important to let the dentist know that whatever is presented must have support and without that support, the mediator or court will not accept the valuation as being independent. The dental client should be reminded that his or her attorney is the advocate and will argue the case and the mediator and courts are looking for independence from the evaluator with an accurate factual presentation. The valuation can be advocated as the truth by the evaluator and can support every point in the valuation as accurate and justified.

There are some areas of the valuation that can be presented in a separate report such as an Opinion of the allocation of personal goodwill versus the dental practice or enterprise goodwill that will serve the dental client well no matter how high the valuation amounts are stated to the surprise of the dental client. In about 40 of the 50 states, the type of distribution a mediator or court oversees is known as an “equitable distribution state. This means that if the client wants to have the evaluator prepare another report to support the allocation, that is certainly acceptable and will many times assist the court in determining which part to the dispute receives what amount.

What happens in an equitable distribution state and what are the parameters of the allocation?
The concept in an equitable distribution state for the distribution of the value of the dental practice between the litigants is one where the personal goodwill is produced by the dentist and it is not part of the marital estate since that asset cannot be transferred during a sale or distribution to a spouse. It remains his or hers for the duration of the existence of the dental practice. The enterprise goodwill is a marital asset and is subject to distribution from the dental practice since it is not wholly produced by the dentist but by the team, or the dental practice itself.

Some of the items included in the value of the enterprise goodwill or the marital estate of the dental practice include an allocation of amounts segregated to the office staff, the infrastructure of the office, the telephone number, the accounting and computer systems, the location of the office, whether the dental practice is a solo practice or one of many, and other items that are listed and allocated as those of the enterprise and not of the individual dentist. There is an actual format that is used and is known as the Multi Attribute Utility Model or Method and uses the initials MUM for brevity. This lists the various attributes and allows the evaluator to allocate an amount to each in order to determine how much of the dental practice valuation should be assigned to the personal goodwill of the dentist and the amount to assign to the enterprise or marital asset value of the dental practice.

Suggesting the Opinion of the Allocation of Goodwill
The dental practice evaluator will suggest this additional report to the dental client and to the attorney representing the dental client and will explain how this will probably assist in allowing the allocation of the value to probably be assigned in large part to the personal goodwill of the dentist. In almost all cases of solo or 1 or 2 dental practice ownership positions, the primary dentist, most likely the owner, is the one who will have the majority of the goodwill assigned to him or her and will take the value of the dental practice with its assignment of personal goodwill to mean a larger distribution to the dentist rather than to the spouse of the dentist.

The reasoning is that it is almost always the owner/dentist who is the largest producer of revenue for the practice as well as the one to whom most of the attributes are attributed. Examples can be when the phone rings at the office and a prospective patient requests an appointment, the receptionist will have that appoint first with the owner/dentist who may continue the oral care for that person or who will assign the new patient to a hygienist or someone else in the office. There are many studies reflecting the large amount of goodwill attributed to the personal goodwill of the dental owner, especially when there are few practices involved with the ownership.