Valuation and Division of a Dental Practice in Divorce

Your office and dental practice will be assigned to you in the divorce without a doubt. The real question is: Will you have to give your spouse any money for keeping your dental practice? In essence, what is the value of your business?

There are plenty of professionals and articles written to help you determine the value of your business. An expert can look at the profit and loss statements, your receivables and the income generated each year. How much goodwill exists in your business?

In cases with a business that only has personal goodwill, there is unlikely to be much value attached to that business. Sure, you’ll have some value attached to computers and office equipment, but you’ll also want to look at how much cash is on hand. How much is there in accounts receivables? How much inventory is there?

Valuation of a Dental Practice in the Marriage of Schneider

In your dental practice, your reputation, knowledge, and relationships will be essential to your business’s current and future value. We call this personal goodwill. The Illinois Supreme court looked at this in the case of In re Marriage of Schneider, 214 Ill.2d 152, 291 Ill. Dec. 601, 824 N.E.2d 177 (Ill. 2005).

Case Background

In the Schneider case, dentist Earl Schneider filed a petition to divorce his wife, Jodi Ann. At trial, one of the stipulations the parties agreed to was that Jodi would waive maintenance in lieu of taking a disproportionate share of the marital estate. The court entered its judgment and one of the contested issues was the value of Earl's dental practice. In valuing Earl's dental practice, the circuit court excluded personal goodwill and accounts receivable from the fair market value of the practice. The circuit court also allocated 67% of the marital assets to Jodi, noting the duration of the marriage, the reasonable opportunity of each spouse for the future acquisition of capital assets and income, and that the apportionment of assets was in lieu of maintenance.

Personal Goodwill and Accounts Receivable in Dental Practice

The appellate court affirmed the circuit court in part and reversed in part. 343 Ill.App.3d 628, 278 Ill.Dec. 485, 798 N.E.2d 1242. The appellate court held that personal goodwill and accounts receivable should have been included in the valuation of Earl's dental practice. The appellate court, therefore, reversed the circuit court's valuation of the dental practice and remanded for a redistribution including those assets. The Supreme Court allowed Earl's petition for leave to appeal the appellate court's holding that personal goodwill and accounts receivable should have been included in the valuation of the dental practice.

Prior to trial on the petition for dissolution, the parties agreed that Earl's gross income as a self-employed dentist was $325,000, with a net income of $195,000. Earl's expert witness testified that the fair market value of the dental practice was $346,300. Of this amount, $311,300 was attributed to personal goodwill and $35,000 to fixed assets. The fixed assets included property and equipment, but did not include cash on hand, accounts receivable, cash surrender value of life insurance, and loans due from officers. The expert testified that the accounts receivable were merely a reflection of future income.

Jodi's expert witness testified that the fair market value of the dental practice was $481,000. From the $481,000, the expert attributed $144,413 to tangible assets, including accounts receivable, furniture and equipment, cash surrender value of insurance, and inventory. The remaining $336,587 was attributed to intangible assets, although those intangible assets did not include personal goodwill. The intangible assets were described as dental records, the leasehold interest, a trained workforce, intellectual property, trade names, and enterprise goodwill.

The trial court valued Earl's dental practice at $38,300. This amount included $8,000 in inventory and $30,330 in furniture and equipment. The circuit court did not include accounts receivable, cash on hand, cash surrender value of life insurance, and loans due from officers in the valuation, accepting Earl's argument that including those items in the valuation would result in a double-counting of those assets. In addition, the circuit court held that any goodwill that existed in the practice was personal goodwill that should not be included in determining the fair market value of the dental practice. The circuit court stated that Jodi's expert witness had failed to establish the existence of any enterprise goodwill in the practice.

On appeal, the appellate court was charged with determining if the trial court erred in its valuation of Earl's dental practice. Jodi argued that the circuit court should have included goodwill, accounts receivable, loans due from officers, cash surrender value of insurance policies, and cash on hand in its valuation of the dental practice.

Personal Goodwill Considered Divisible Marital Asset

The appellate court reversed the circuit court in part and found that the trial court erred in excluding personal goodwill from the valuation of Earl's dental practice. The court held that personal goodwill is not to be considered a divisible marital asset, however, that if goodwill is not considered as part of a spouse's income-generating ability relative to a maintenance award, it may be considered in the valuation of a professional practice as a divisible marital asset. In addition, the appellate court held that accounts receivable are business assets and should have been included in the valuation of the dental practice. The Appellate court also found that the trial court erred in not including the cash on hand, cash surrender value of insurance policies and loans due from officers in determining the fair market value of the dental practice. The court ordered the case to go back to the trial court for a reevaluation.

Appeal to the Illinois Supreme Court on Personal Goodwill

Earl then petitioned the Supreme Court of Illinois to hear his case, which they accepted. Earl asked the Supreme Court to decide if the goodwill and accounts receivable should have been included in the valuation of his dental practice. The issue in this case-whether personal goodwill must be considered a divisible marital asset when spousal maintenance is not awarded-presents an issue of law and not a question of fact.

In support of his claim that the appellate court erred in considering personal goodwill in valuing his dental practice, Earl contends that the appellate court majority misinterpreted this court's decision in In re Marriage of Zells, 143 Ill.2d 251, 157 Ill. Dec. 480, 572 N.E.2d 944 (1991). At issue in Zells was the division and distribution of marital property between a lawyer and his spouse. Zells, 143 Ill.2d at 252, 157 Ill.Dec. 480, 572 N.E.2d 944. The circuit court and the appellate court had found that the goodwill in the husband's law practice was a marital asset subject to division and distribution. Zells, 143 Ill.2d at 252, 157 Ill.Dec. 480, 572 N.E.2d 944. In addressing the issue, this court noted that the appellate court districts were divided on the issue of whether personal goodwill should be considered in valuing a professional practice. Zells, 143 Ill.2d at 254-55, 157 Ill.Dec. 480, 572 N.E.2d 944. For example, the Fifth District, in In re Marriage of White, 98 Ill.App.3d 380, 384, 53 Ill.Dec. 786, 424 N.E.2d 421 (1981), had held that goodwill was a factor to be considered in valuing a professional corporation. The White court had noted that "despite the intangible quality of goodwill in a professional practice, it is of value to the practicing spouse both during and after the marriage and its value is manifested in the amount of business and, consequently, in the income which the spouse generates." White, 98 Ill.App.3d at 384, 53 Ill.Dec. 786, 424 N.E.2d 421. In contrast, the First District had taken the position that the goodwill of a professional business was not marital property subject to division. In re Marriage of Wilder, 122 Ill.App.3d 338, 77 Ill.Dec. 824, 461 N.E.2d 447 (1983).

In re Marriage of Courtright, 155 Ill.App.3d 55, 107 Ill.Dec. 738, 507 N.E.2d 891 (1987). The appellate court in Courtright stated that:

"Although many businesses possess this intangible known as goodwill, the concept is unique in a professional business. The concept of professional good will is the sole asset of the professional. If goodwill is that aspect of a business which maintains the clientele, then the good will in a professional business is the skill, the expertise, and the reputation of the professional. It is these qualities which would keep patients returning to a doctor and which would make those patients refer others to him. The bottom line is that this is reflected in the doctor's income-generating ability."Courtright, 155 Ill.App.3d at 58, 107 Ill.Dec. 738, 507 N.E.2d 891.

In essence, although goodwill had not been considered in the trial court's valuation of the husband's business itself, goodwill was a factor in examining the husband's income potential. The court in Courtright concluded that, although goodwill had not been considered in the trial court's valuation of the husband's business itself, goodwill was a factor in examining the husband's income potential. The court held that to figure goodwill in both facets of the practice would be to double count and reach an erroneous valuation. 

In Earl’s case though, Jodi had already waived maintenance.  She asked the reviewing courts to let her change that stipulation in light of the trial court’s ruling, but that was not allowed.  She’d already waived maintenance, and the trial court had already given her a disproportionate share of the marital estate due to that waiver.  The Supreme Court was not going to allow her to change that now because she didn’t get the ruling she wanted.  In this case, the personal goodwill in Earl's dental practice was considered by the circuit court in assessing the criteria used to award Jodi a disproportionate share of the marital assets. Any further consideration of that goodwill in valuing Earl's dental practice would amount to an impermissible double counting.  The trial court’s ruling evaluating Earl’s dental practice was allowed to stand. The Supreme Court overruled the appellate court on this issue. 

Uncollected Accounts Receivables are Assets to a Dental Practice 

The Supreme Court agreed with the appellate court however that the accounts receivables have not been collected, so they are assets.  They have been earned and have a known value and, thus, are distinguishable from future earnings or income-generating ability. Because accounts receivable have a known value, a court can properly consider accounts receivable as assets of the business. Accounts receivable are future income only in the sense that they will be collected in the future. Accounts receivable are not future income in the sense that they are assets considered by a circuit court in determining a party's income-generating ability for purposes of maintenance or child support awards. The fact that the accounts receivable may not be collected until a future date does not transform those assets into speculative or future income. Consequently, we agree with the appellate court that the circuit court should have considered the accounts receivable in valuing Earl's dental practice. The Supreme Court affirmed that portion of the appellate court's order remanding this cause to the circuit court for a redistribution of marital property which includes accounts receivable, in addition to cash on hand, cash surrender value of life insurance, and loans due from officers. 

If you’re a dentist facing a divorce it is common to have concerns about dividing property including a professional business. When you need assistance and advice knowledgeable and experienced divorce attorneys, contact Anderson & Boback and we’ll be ready to help you with all aspects of your divorce including valuation and division issues surrounding a dental practice.

THIS ARTICLE WAS PREVIOUSLY PUBLISHED AT:  https://illinoislawforyou.com/divorce/dividing-a-dental-practice-in-divorce/