“I think I want a divorce from my spouse, but I’m hesitant because I know it’s going to be such a pain. It will shift my focus away from my practice and my patients. And frankly, I’m scared about the financial price I might have to pay.”
This doctor expresses feelings common to many physicians facing a divorce. Having invested a great deal of time and money completing his or her medical training and then building up a practice, the thought of undercutting that investment is understandably disconcerting at best and terrifying at worst. The goal of this article is to replace that fear of the unknown with information to assist doctors, like the one above, with the tools to begin to formulate a plan.
From a financial perspective, a successful doctor who is planning to divorce faces two sets of issues.
The first set has to do with the medical practice itself. What is a spouse entitled to with regard to this asset, and how can it be paid out without impacting the profitability of the business? Regardless of whether this interest can be sold or not, a doctor’s spouse will more than likely be entitled to a share. The Courts in the District of Columbia, Maryland and Virginia have recognized many different methods of valuing a business in a divorce context. However, there is no one-size-fits-all solution – the valuation method used must be appropriate to the specific facts of the situation and the couple.
Further, the valuation method must distinguish between professional or personal goodwill which is attributable to the doctor individually and is not divisible in a divorce action, and practice or commercial goodwill which is attributable to the practice and therefore may be divisible.
In addition to complex valuation issues which will require retaining an expert, the fact that the practice is illiquid will necessitate creativity in crafting the best approach to compensate the spouse for her or his interest in the marital portion of the practice. In dealing with these complex issues, the doctor client needs a strategy and effective advocacy, and retaining an experienced family law attorney well versed in this unique set of issues will be key. How and when to value the business should be among the first questions he or she discusses with an attorney in the early stages of exploring a divorce.
The second set of financial issues relate to spousal support. The amount of alimony and the duration of the payments will depend on a myriad of factors and is very case specific. But of particular interest to the doctor client will be the question of “double dipping.” That is, if the valuation method uses either historic earnings or discounted future earnings, wouldn’t the spouse who receives both a buyout of the value of the medical practice and spousal support be compensated twice for the same stream of income? The law in the District of Columbia, Maryland and Virginia recognizes this problem, but expert advocacy will be needed to most advantageously navigate this complex area of divorce law.
Entwined as part of both these concerns is the frustration a doctor will feel in having to obtain the financial information necessary to value a business. It can be frustrating to put off patients who need you or take time away from managing your practice to locate information that may seem irrelevant to you.
So if you are a physician who is contemplating a divorce, what should you be doing?
- Retain an attorney you trust as soon as possible and follow his or her advice. Don’t make any moves on your own without obtaining legal guidance first.
- Start getting your financial house in order. Locate several years worth of your personal financial records and start the process of obtaining your business’s financial records for the benefit of both your attorney and your valuation expert.
- Be open and transparent with your spouse. Don’t play games. If you create distrust, you will only make the process more complicated and expensive.