Valuing a professional practice in a divorce

Dividing assets in a Tennessee divorce can be relatively simply if the value of the assets can be readily ascertained. For example, real property can be appraised. The value of stock in a publicly held corporation will depend almost entirely on the price at which the stock trades. In contrast, the value of a professional practice, such as medicine, law, architecture, accounting and the like, can easily become the most contentious issue in a high asset divorce.

Many business enterprises are valued by determining the fair market value, that is, the amount of money which a willing buyer will pay to a willing seller. This method valuation does not work for professional practices mostly because individual interests in such practices cannot be readily bought and sold. If the parties in the divorce cannot agree on the value of one spouse’s legal practice, for example, the court must use other techniques to value the business.

An obvious approach is to determine the net asset value of the practice. Assets include equipment, fixtures, the present value of any leases and cash on hand. Liabilities are then deducted to arrive at net asset value. This method may seem simple, but it often undervalues the practice by failing to include any future income, commonly called “good will.” This result is especially common in sole practices. If the professional spouse is part of a larger group such as a law firm or medical clinic, the court may conclude that the group practice is more like a closely-held corporation and that it has a much higher expectation of future income that should be included in the net asset value calculation.

The valuation of a professional practice can be an extremely thorny issue in a high asset divorce. Anyone facing a divorce that will involve this issue may wish to consult an attorney experienced in handling complex property division cases. A knowledgeable divorce attorney will be familiar with various methods of asset valuation and can provide helpful advice about the use of valuation experts and legal strategies that can maximize the likelihood of a favorable outcome.