Dentists living or working in a state that relies on intrinsic value to determine the value of a dental practice present a difficult decision for a judge, especially during divorce proceedings.
Since intrinsic value implies the worth of the dental practice to the dentist operating it, that value will almost always be higher than the fair market value of the practice.
An example is the intrinsic value of a dental chair that may be 10 years old. That chair would have a very low fair market value on the open market. Its intrinsic value to the practice owner, however, would be much higher, since she or he can continue to use the chair for many more years.
Bruce Bryen, CPA, CVA.
During divorce proceedings, the spouse of the dentist will typically attempt to assert intrinsic value to govern the proceedings. This is especially troublesome to the dentist who may already be dealing with financial difficulties and emotional strain while preparing for trial.
At the same time, the dentist must assist the dental practice valuator with gathering information about the practice. This creates double the work for a dentist who is still trying to operate day to day.
Who can assist the dentist during divorce proceedings and practice valuation?
During divorce proceedings, the person or team best positioned to assist the dentist in gathering pertinent information is a dental practice certified public accountant (CPA). They understand the cash flow of the practice, the challenges it faces, and they even have a good idea of its value.
The CPA can assist the dental practice evaluator with gathering the documents needed to assemble data so the evaluator does not stumble or spend unnecessary time on items that are not material to the valuation.
The financial position of the dental practice, viewed through the lens of intrinsic value, reflects what the practice is worth to the dentist operating it. Even a petition in bankruptcy court does not relieve the dentist of the value attributed to the practice based on its intrinsic value. This puts the dentist in a very weak position during the divorce, because the value of the dental practice can’t really be reduced.
There is no question that the spouse will urge the valuator who has been retained to present the intrinsic value methodology. The argument for an intrinsic value approach is really only useful to the spouse, who will always argue that the dentist wants the valuation to be as low as possible.
The valuator who does not use a fair market value or fair value approach also risks presenting something the judge does not want to hear. Of course, the dentist wants the practice value to be as low as possible -- just as the spouse wants it to be as high as possible.
Presenting conflicting practice valuations in court
If the divorce proceedings are in a state with equitable distribution guidelines, even if the dentist files a bankruptcy petition to protect the assets, the divorce trial judge can disregard the valuation used by the bankruptcy judge.
The judge who renders the final opinion in a divorce trial in which intrinsic value is used will rely on the value of the practice to the dentist -- an amount that is well in excess of the bankruptcy petition’s stated value, which may be close to zero when the dentist’s debts are factored in.
It is therefore urgent that the dentist's advisers do their best to keep intrinsic value out of the divorce proceedings and use the bankruptcy court’s final determination of the practice value reserved for creditors.
If, however, the intrinsic value presentation prevails, there is little left for the dentist to do but appeal the decision and request that the bankruptcy court’s determination prevail.
Finding an expert in dealing with intrinsic value guidelines
What is one of the best approaches to finding an attorney and other experts who have dealt with intrinsic value situations? It is to look at the state’s published court cases where intrinsic value guidelines did not prevail over the fair market value approach.
The people who won similar cases -- and the firms behind them -- clearly did something right. Getting copies of their transcripts, depositions, and the case law they used can be extremely helpful.
It’s often worth paying for guidance from those who have succeeded in comparable situations. And watching how the losing side handles any appeals in those cases can also provide valuable insight.
Bruce Bryen is a certified public accountant with more than 45 years of experience. He specializes in providing litigation support services to dentists, with valuation and expert witness testimony in matrimonial and partnership dispute cases. Bryen assists dentists with financial decisions about their practice, practice sales, evaluating whether to join a dental service organization, practice evaluation during divorce proceedings, and questions about the future or financial health of dental practices. He can be reached at [email protected].
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