Valuing a Dentist’s Dental Practice Under Tennessee Divorce Law
Valuing a Dentist’s Dental Practice Under Tennessee Divorce Law
If one party to a divorce owns a dental practice, Tennessee courts often place a value on the practice. The court then divides the value between the two parties as part of the marital estate. Both parties are given an opportunity to present expert testimony at trial regarding the value of the dental practice. When two parties present conflicting evidence, the trial court may assign a value to the practice that is within the ranges of the two valuations. This article explores three cases where Tennessee courts assigned value to a dental practice and distributed the value as part of the marital estate in a divorce.
The divorce of Dr. Eberting and his wife was sparked by the dentist’s numerous extra-marital affairs and his consuming devotion to hobbies including acting, flying, karaoke, and marathon training. Eberting v. Eberting, No. E2010-02471-CA-R3-CV (Tenn. Ct. App. 2012). Dr. Eberting owned an orthodontic practice, which he purchased for $250,000 from another dentist. He drew an annual salary of $250,000 from the practice, and he paid for personal expenses such as football tickets, weight loss programs, clothing, haircuts, meals, and massages from the practice’s business account. Although the practice claimed about $1,050,000 in revenues, contained $300,000 in state-of-the-art equipment, and was housed in a building worth at least $950,000, Dr. Eberting presented an expert that valued the practice at $224,000. The valuation of Dr. Eberting’s expert, James Lloyd, included the hard assets of the business minus the practice’s liabilities. His wife’s expert, William Robert Vance, valued the practice at $700,000, which included cash, accounts receivable, and goodwill.
The trial court valued the orthodontic practice at $500,000, which was the value assigned to the practice in Dr. Eberting’s personal financial statements. Dr. Eberting appealed and claimed the trial court’s valuation of the practice was erroneous. The Tennessee Court of Appeals affirmed the trial court’s valuation. The Court agreed with Dr. Eberting that professional goodwill should not be a part of the value of a dental practice. However, the Court noted that the value of $224,000 assigned by Dr. Eberting’s expert was actually less than he originally paid for the practice, before moving into a state-of-the-art building and purchasing state-of-the-art equipment. Dr. Eberting even testified at trial that he would be upset if his business were to sell for $250,000. Noting that the trial judge is “not required to check his or her common sense at the door when considering evidence,” the Court of Appeals found the $500,000 valuation contributed to an equitable division of property between Dr. Eberting and his wife.
Dr. McKee filed for divorce after a long period of alleged abuse and adultery. McKee v. McKee, No. 06-1965DR (Tenn. Ct. App. 2010). Her dental practice, which began as a sole proprietorship, grew into a larger practice when two other dentists bought shares of the practice. Dr. McKee owned a 1/3 interest in her practice at the time of divorce. Much of the purchase price at the time of the sale was for the goodwill of the practice. At trial, Dr. McKee and her husband both presented expert testimony regarding the valuation of the dental practice. Dr. McKee’s expert, Tom Price, valued her share of the practice at $97,220, while her husband’s expert, Mike Hallum, valued her share of the practice at $460,000. The goodwill value of the practice’s patient files was not included in Dr. McKee’s expert valuation. The expert hired by Dr. McKee’s husband included goodwill in his valuation because he considered the goodwill of the practice to be “business” goodwill, not “personal” goodwill. The experts hired by both parties agreed that it was appropriate to include business goodwill in the valuation of a practice, but to exclude personal goodwill.
The trial adopted Dr. McKee’s valuation of the dental practice at $97,220. The court then distributed 75% of the value to Dr. McKee and 25% of the value to her husband. Dr. McKee’s husband appealed, claiming the valuation was incorrect and that he was entitled to at least half of the value of the practice. The Tennessee Court of Appeals affirmed the award of the trial court. Noting that “courts have consistently held that personal goodwill cannot be a component in the valuation of a professional practice in an equitable distribution of a marital estate,” the Court of Appeals found that Dr. McKee’s expert valuation was reasonable. The Court determined that personal goodwill was associated primarily with the individual practitioner, while business goodwill was associated primarily with the practice as an institutional entity. Dr. McKee’s valuation relied heavily an earlier valuation done by a consulting and accounting firm that specialized in dental practices and worked with Dr. McKee’s practice for thirteen years prior to trial. The earlier valuation allotted 45% of the total purchase price to the personal goodwill of the practice. During the course of the sale, no value was ever placed on the practice’s business goodwill. Dr. McKee’s husband had access to the accounting firm’s valuation figures and actually used them in his own valuation. Accordingly, the Court of Appeals further held that although the earlier accounting firm was not available to testify to the valuation at trial, testimony from the earlier firm was not necessary.
Dr. Elkins’ wife worked at his dental practice as a hygienist and was familiar with the practice’s accounting methods. Elkins v. Elkins, 1999 WL 1076940 (Tenn. Ct. App. 1999). At trial, Dr. Elkins’ wife testified that the overall collection rate was 98.1%. His wife also presented an expert witness who testified to similarly high collection rate figures, and valued the practice’s accounts receivable at $110,000. Dr. Elkins did not present an expert. He admitted that the practice’s accounts receivable report at the time of trial showed a valuation of $137,206, and the overall collection rate was 90%. Despite this admission, Dr. Elkins testified that the value of the accounts receivables were $81,924. The trial court valued the practice at $110,000, and awarded the amount to Dr. Elkins as part of his dental practice. Dr. Elkins appealed the trial court’s valuation. The Tennessee Court of Appeals affirmed the trial court’s valuation, finding that the “evidence [did] not preponderate against [the wife’s] valuation.”
The dental practice valuations of two parties in a divorce may widely differ. The dentist often presents an expert who places a low value on the practice. The lower the value of the practice, the less the dentist will have to pay to the divorcing spouse when the court divides the marital estate. Conversely, the divorcing spouse often seeks to place a higher value on a dental practice to gain more money from the marital estate. Tennessee courts tend to rely on the expert valuations that they find to be the most realistic and accurate.
For more information about division of professional practices in Tennessee divorce law, see Valuing Professional Practices.
Memphis divorce lawyer, Miles Mason, Sr., JD, CPA practices family law exclusively and is founder of the Miles Mason Family Law Group, PLC, in Memphis, Tennessee. He authored The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers, published by the American Bar Association. Miles is past Chair of the Tennessee Bar Association Family Law Section and is a prolific author and public speaker on divorce trial practice presenting seminars to attorneys, forensic accountants, and business valuation experts.