In many ways, marriage is considered an economic partnership. When you and your spouse go through a divorce, one of the most important tasks associated with the process is to untangle the financial affairs of each party from one another. In New York, property division (which includes all assets) adheres to the doctrine of equitable distribution, which states that all assets must be split in an equitable, but not necessarily equal manner.
If you own a professional practice, the value of your practice will have to be determined before you can resolve all of the property division matters associated with your case. This valuation process can be very complex. There are many factors which must be analyzed before the court can arrive at the true value of your professional practice.
The first step in the process consists of a discovery period where each party’s attorney will review the financial records of the practice. It’s important to understand that only financial records will be analyzed. Confidential patient information is not subject to discovery.
Your professional practice will be considered part of the marital estate regardless of when you started or joined the practice. If you became part of the practice after getting married, all of its value will be considered part of the marital estate. However, if you entered the practice prior to the marriage, the court will only consider the increase in practice’s value during marriage to be marital property.
In order to determine this increase in value, financial records will be evaluated to identify the value of the practice both at the time of the marriage and at the time the divorce action was initiated.
Methods of Valuing a Professional Practice
Before you can arrive at the true value of your practice, you must first determine the standard of value that will be used. The following standards of value are generally accepted by the court:
- Fair market value – the price a buyer would be willing to pay to purchase the practice on the open market
- Liquidation value – the amount of money the owners would receive in the event that they were forced to sell the practice; the liquidation value is almost always lower than the fair market value since it implies the sale was required and not entered into of the owner’s free will
- Going concern value – this is a broad concept that evaluates several other standards of value in order to arrive at an estimate of the practice’s true value
- Book value – the value obtained by adding up all of the practice’s assets and subtracting all liabilities from this total; book value is sometimes used as evidence when determining fair market value
- Original cost value – the purchase cost or start-up cost of the practice
In most instances, the court will use fair market value as the method for determining the worth of a professional practice as part of a divorce. However, this total will generally be reduced by the value of any debts or liens associated with the practice.
Expert witnesses will need to testify when determining the value of your practice. These experts should be highly qualified and understand the facts associated with your case. As part of the valuation process, these experts must consider more than just the fair market value of the practice. Other factors to consider include:
- Tangible assets of the practice
- Accounts receivable
- Contingency fees for work performed during the marriage
- 401(k)s, IRAs and other employment-related pension accounts
Dividing the Practice between Each Party
While the professional practice will be factored into all property division agreements, courts will never actually divide the practice in a way that makes each spouse an owner, partner or shareholder. There are two reasons for this:
- New York State statutes prohibit non-professionals from owning a share of a professional practice
- Creating a situation where each spouse is a co-owner of a business goes against the goal of separating each party from the other’s financial affairs
In addition, the court will never force you to sell your professional practice so that the proceeds can be split between you and your spouse. Instead, the court will award the practice to the owning spouse and in return, the non-owning spouse will either receive:
- A monetary award representing their share of the practice
- Some other marital property that is equal in value to their share (an offsetting property award)
In most instances, the court will issue an offsetting property award unless there isn’t enough other property in the marital estate to offset this value.
Why You Need an Experienced Divorce Attorney
There are several factors which make your choice of attorney crucial if you own a professional practice:
- There is no single required valuation method used in all cases
- The expert appraiser plays a crucial role in the valuation process
- The court has a tremendous amount of discretion in deciding which valuation method to use, how to apply this method to the facts of your case, and in the determination of the actual value of your practice
Due to all of the ambiguity associated with this process, a highly skilled and experienced attorney can play a critical role in the way the valuation is determined.
Les Martin has been handling property division disputes since the Equitable Distribution law went into effect in New York in 1980, and he litigated one of the very first New York Equitable Distribution cases in 1981. He has worked on many cases requiring the valuation of a professional practice, and he knows all of the important factors which go into determining this value. This experience will give you the edge you need when seeking to protect your best interests in court.
If you are considering filing for divorce, please contact Les Martin, Attorney at Law today to schedule a consultation. Mr. Martin serves clients in Nassau, Suffolk and Queens Counties, and throughout all of New York City.