Valuing a Medical Practice in a Divorce

North Carolina divorce law provides for “equitable distribution” of all property acquired by spouses during their marriage. Liquid assets like cash, stocks and bonds are easy to value and split in half. But when it comes to one spouse’s medical practice, there’s no real market value. Still, any interest in a professional practice is still a marital asset subject to equitable distribution.

In 1993, the North Carolina Court of Appeals said, “When valuing a professional practice, a court should consider the business’ fixed assets, the value of its work in progress and accounts receivable, its goodwill and its liabilities.” The term “goodwill” is the most subjective and controversial. Goodwill refers to any intangible factor that might affect the value of the medical practice’s business.

There’s no single method prescribed by law to value goodwill. The North Carolina Court of Appeals has identified numerous acceptable methods, including

(1) determining the price a willing buyer would pay for the medical business,
(2) examining the capitalization of excess earnings,
(3) looking at one year’s average gross income for the practice, and
(4) reviewing sale prices for comparable practices. In addition to these types of practice goodwill, there is also “professional goodwill,” which includes the practitioner’s particular training, skills, reputation, age and health.

Another factor affecting medical practice value is whether it relies primarily on third party payers like managed care organizations. A practice that primarily sees patients on a fee-for-service basis may be more valuable because revenues are not dependent on the changing whims of insurance companies.

Expert testimony from a qualified appraiser is usually necessary to determine the value of goodwill. Both spouses may retain consultants who specialized in professional practice valuation. The court will make a final determination of goodwill value based on the evidence and testimony presented.

Please note that goodwill is not the same thing as the earning capacity of a spouse. The North Carolina Court of Appeals has also held that a medical license acquired during the marriage is separate, not marital, property and does not necessarily have a monetary value. However, “marital efforts” that increase the value of the license may be subject to equitable distribution.