How Will the Court Treat Our Business or Professional Practice?
A business or professional practice is an asset in divorce, and at the same time it may have many unique attributes. If you or your spouse own a business or professional practice, it is important that you work with your attorney early in your case to develop a strategy for valuing the entity and making your case for how it should be treated in the division of property and debts.
The valuation of such interests can become complex. This often is based upon whether the business has an element of intangible value, or what we call “goodwill.” This means a value in excess of the identifiable, tangible assets of the business or practice. For instance, many businesses have tangible assets such as money in the bank, equipment, inventory, and real estate. In addition to these identifiable “hard assets,” the business may have a value to a buyer which is not tangible, but which is based upon the value of its free cash flow or some other index related to revenue.
There are several approaches to value, and many acceptable methodologies for determining this value, depending upon the type of business and the purpose for which the value is sought—i.e. the “premise” of value. All of business valuation is based upon the idea that an investor might purchase, say, a sales or manufacturing business, for a number which significantly exceeds the value of its identifiable tangible or hard assets, where it can be demonstrated that the investor can expect to receive a return on the investment in the form of this predictable revenue or cash flow from the ongoing operation of the business. A buyer of the business would benefit from the existence of its building and lot, its manufacturing equipment, its sales force already in place, and its inventory.
However, the “value” of a professional practice is derived from a different source—typically, it arises strictly due to the professional skill of the owner who is a professional, and for whose services a fee is charged. This distinguishes many professional practices from treatment strictly as “businesses” in the divorce context. The sales or manufacturing business mentioned above could be purchased by someone, who can continue to operate the business with existing personnel and management. However, the work of an endodontist or surgeon is the source of the revenue in such professional practices, and these skills are not “transferable” to a buyer in most situations. Therefore, what value do these skills have to a buyer?
Where the value of the business in question is highly dependent upon the individual skills of the professional, there may be little to “sell” and it may have to be treated differently in a divorce case than one would treat another business interest.
Missouri has a very robust body of law addressing these issues, and which aids lawyers and the courts in making these distinctions. The leading case in our state on the topic is the Missouri Supreme Court case of Hanson v. Hanson. The Hanson case involved the value, for divorce purposes, of an oral surgery practice. Hanson prescribed a very specific set of requirements for determining the existence of this intangible value in excess of hard assets, in a professional practice. Hanson has been applied over the years to a wide variety of professional practices and entrepreneurial enterprises which are dependent upon the skill and ability of the individual practitioner.
We find the topic of business and professional practice valuation to be a particularly interesting area of family law practice, and we’ve written and lectured on the topic many times. Please feel free to call us so that we can discuss, in confidence, the circumstances of the particular business or professional practice owned by you or your spouse.