Community property states offer one of the most difficult assignments that a dental practice valuator can have. The central question is whether the community property state also uses fair value -- not fair market value -- as the basis for determining the practice's value?
A dentist involved in a divorce has an incredibly hard time deviating from the valuation amount presented by their own retained expert. The spouse, however, almost always believes any valuation is too low, regardless of the amount, and can seek to retain a competing valuation expert to challenge the results.
Bruce Bryen, CPA, CVA.
Courts do not look favorably on dental practice valuations that are artificially high or low and that appear designed to assist the party retaining them. Dental practice evaluators are not advocates like attorneys. They are supposed to present a fair, unbiased opinion of value that should be usable by either party.
Dentists typically want the valuation on the low side; spouses typically want it much higher. When credible published cases, articles, or books exist that lend scientific support to either argument, that information assists courts in determining which presentation best fits the situation.
Are there extenuating circumstances that advisers can rely on?
There are few circumstances where relief can be granted from a fair value presentation. Understanding that fair value differs from fair market value in significant ways helps the parties at least understand why the amounts appear as they do.
One accepted exception applies when assets were acquired by gift or inheritance, but only if those assets remained segregated from pooled or jointly used resources throughout the relationship. They cannot be part of a combined account used jointly by the couple.
The primary question is whether the asset at issue was kept separate and not available for joint use. This is a very difficult standard to meet, since it is virtually impossible in a shared relationship to keep assets genuinely separate as the years pass, particularly when the relationship is a good one and the natural inclination is to share everything.
What is fair value, and why does it present difficulties for the dentist and the evaluator?
Under fair market value, discounts are allowed for the lack of a large pool of potential buyers and for minority ownership interests. These amounts can be negotiated from the stated valuation figure.
It is incumbent on advisers to discuss these important areas with their dentist client before any contracts are finalized. A discount for lack of control is a major consideration, often involving large sums of money. Advisers with little experience valuing dental practices should not be consulted for these issues. When choosing a sales broker, a dental-specific broker with substantial experience should be retained. General business brokers or brokers unfamiliar with the dental profession should be avoided.
These discounts are available in about 40 states. In states that apply fair value as the standard, discounts do not apply, as they are already excluded by the definition of fair value itself.
In the event of a sale -- not a divorce -- what options does a dentist in a fair value state have?
Like states using fair market value, both parties can negotiate the practice valuation to lower the divorce settlement amount or increase its value in a sale.
A dentist may be able to document that illness, hospitalization, or another legitimate circumstance temporarily reduced production, which could affect the practice’s value. Any such explanation must be accurate and verifiable, as supporting records from physicians, hospitals, or other sources may be reviewed, and credibility is critical in both transactions and legal proceedings.
A similar situation arose during the COVID-19 pandemic, when many dental offices closed, reduced their operating hours, and struggled to retain their staff. Sale negotiations during that period were easier to explain, given the documented impact of the global pandemic on every practice.
Divorce proceedings, however, can be more contentious. A spouse may challenge a lower valuation while the dentist would assert the figure accurately reflects the given circumstances, such as the reduced revenue during COVID-19.
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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