Valuing a Doctor’s Medical Practice Under Tennessee Divorce Law
Valuing a Doctor’s Medical Practice Under Tennessee Divorce Law
Valuation of a medical practice requires a business appraiser or business valuation expert witness and knowledge of Tennessee divorce law regarding the particular type of professional practice.
In Tennessee divorce law, a doctor’s spouse has the burden of proving that the doctor’s medical practice fits within Tennessee’s statutory definition of marital property and is not the doctor’s separate property. An increase in value of the medical practice during the period of the marriage may also be considered marital property if the doctor’s spouse can present evidence relating to the value of the practice before and after the marriage, and can also prove both parties made a substantial contribution to the practice during the marriage. If the medical practice is considered marital property instead of separate property, the doctor’s spouse will receive part of the value of the practice upon divorce.
The valuation of a medical practice in a divorce is an issue that is often hotly contested. It is in the best interests of the doctor’s spouse to hire experts to place the highest value possible on the medical practice. Conversely, it is in the best interests of the doctor to hire experts who will place the lowest possible value on the practice. This article explores the factors Tennessee courts consider when valuing a medical practice.
Doctor Batson owned a practice specializing in internal medicine and experienced a brief and tumultuous relationship with his third wife. Batson v. Batson, 769 S.W.2d 849 (Tenn. Ct. App. 1988). The trial court hearing the Batson divorce classified the doctor’s practice as separate property, which prevented his wife from receiving any proceeds from the practice. The doctor’s wife appealed and claimed that the accounts receivable from the medical practice were marital property. The doctor argued that the value of his practice was higher before he married his wife, his wife contributed nothing to the practice, and that the practice should remain separate property.
The Tennessee Court of Appeals disagreed and held that the accounts receivable from the doctor’s medical practice at the time of the divorce was marital property. The Court of Appeals noted that accounts receivable was only considered marital property if “both spouses contributed substantially to earning them.” (Citation omitted.) The spouse did not have to contribute directly to the practice; any indirect contribution (for example, an effort in the household) was considered to be a “substantial” contribution. Using a trial court finding of fact that the doctor’s wife substantially contributed as a stepmother and homemaker during the marriage, the Court of Appeals declared the accounts receivable of the medical practice to be marital property subject to division between the parties.
Doctor Hazard owned a medical practice specializing in pulmonary medicine with an emphasis on critical care patients. Hazard v. Hazard 833 S.W.2d 911 (Tenn. Ct. App. 1992). The doctor hired an expert involved in the sale of medical practices who valued his practice at $42,818. This valuation was based on the value of the accounts receivable, equipment, fixtures, cash on hand, office equipment and supplies, and inactive medical charts. The valuation presented at trial by the doctor excluded goodwill. The doctor’s wife hired a CPA who valued the medical practice at $629,000. This valuation was based on the price for which another medical practice in the same city was sold, gross revenues, and the goodwill of the practice. The trial court held the medical practice was marital property and valued the medical practice at $200,000.
On appeal, the doctor did not dispute that the practice was marital property, but claimed that the trial court overvalued his medical practice. The Tennessee Court of Appeals agreed with the doctor and revalued the medical practice to $42,818. The decision of the Court of Appeals rested on the idea that professional goodwill was not part of the marital estate. The goodwill of a medical practice was essentially the reputation of the medical practice; it could not be sold and did not have a value separate from the business itself. Similarly, the Court of Appeals held that the gross revenues of the medical practice should not be used to determine the value of the practice. The final valuation of the medical practice included physical assets and accounts receivable.
Doctor York began his marriage as a solo surgical practitioner, but moved and expanded his practice into a multi-specialty medical group with two other physicians. York v. York 1992 WL 181710 (Tenn. Ct. App. 1992). The Doctor owned an 85% interest in the medical practice, which the doctor testified was worth $750,000 to $800,000 in an unrelated deposition two months before his divorce. The doctor hired an accountant to testify at trial that valued the practice at $206,436 and valued the doctor’s interest in the practice at $175,470. Another witness hired by the doctor testified to similarly low numbers. The doctor’s wife hired an expert witness who valued the practice at $1,980,000, and valued the doctor’s interest in the practice at $1,683,000. The trial court valued the medical practice at $800,000 and valued the doctor’s 85% interest in the practice at $680,000. This was a significant portion of the $2.7 million marital estate. The doctor received 62% of the marital estate and his wife received 38% of the estate.
The doctor appealed the trial court’s division of property, claiming his interest in the medical practice was overvalued and that the trial court was incorrect to give his wife 38% of the marital estate. The Tennessee Court of Appeals affirmed the trial court’s valuation. In contrast to the traditional medical practice at issue in Hazard v. Hazard, the medical practice in York v. York was a multi-specialty corporation and could not be valued in the same manner. Because no case law existed in Tennessee that directly addressed the valuation of a multi-specialty practice, the Court of Appeals found it appropriate to defer to the trial court’s calculation of the net asset value of the practice.
In conclusion, the valuation of a medical practice in Tennessee depends on a number of factors. The divorcing spouse’s contribution to the practice or to the household during the marriage determines whether the practice is considered marital property or separate property. A smaller, traditional practice is valued based on its tangible assets and accounts receivable. The valuation of a larger, corporate practice is based on the net value of the practice, which is determined by a fact-driven inquiry at trial. Whatever the size of the medical practice, the doctor’s personal goodwill will not be included in the value.
Read more about Memphis divorce attorney Miles Mason, Sr. JD, CPA. He practices family law exclusively with the Miles Mason Family Law Group, PLC in Memphis, Tennessee. He has taught seminars across the nation on divorce trial practice, professional practice valuation, and forensic accounting to judges, lawyers, CPAs, and business appraisal expert witnesses. Miles authored The Forensic Accounting Deskbook, published by the American Bar Association Family Law Section, which addressed many aspects of valuing and investigating businesses in divorce including professional practices. For more information, see When Professionals Divorce in Tennessee: Valuing Professional Practices.