When doctors, dentists, lawyers, and licensed professionals are estranged from their spouses, they might wonder about how the judicial system will treat their professional practices in divorce. A professional practice might be viewed as a hybrid of a job and a business; in some cases, the practice cannot operate apart from the skill and reputation of the professional who attracts and serves customers. In the world of forensic accounting, this concept is known as “personal goodwill.” One of the great challenges of handling professional practices in divorce is to recognize, quantify and protect personal goodwill – and find other ways to compensate the professional’s spouse in a divorce.
In many jurisdictions, personal goodwill may not be counted as marital property. Personal goodwill is not marital property if it is not transferable to a seller. If a licensed professional could sell the professional practice and walk away, then customers and clients might also leave. A buyer would pay little or nothing for a professional practice that could not attract and retain customers. So, for the purposes of a divorce, the practice might be worthless.
Personal goodwill is not self-evident. In most divorce cases, a family lawyer or forensic accountant must prove it by examining the referral sources for the professional practice, the existence of other professionals who could substitute for the seller, and the value added to the practice by elements apart from the licensed professional. For instance, a medical imaging practice might have value, apart from its radiologists, in the expensive equipment that a buyer would need to break into the field. A dental practice might have value in its cadre of skilled, trained hygienists.
For instance, in 2005, a Florida appeals court held that personal goodwill was not marital property in connection with an insurance agency. In Held v. Held, 912 So.2d 637 (Fla.App. 2005), the appeals courts held that an insurance agent’s personal relationship with 60 condominium associations was personal goodwill not transferable to a purchaser, and thus not marital property. Even businesses that do not involve licensed professionals might have an element of personal goodwill.
Dealing with professional practices in divorce also requires a family lawyer to observe legal restrictions against “double dipping.” A professional practice may be viewed as an income-generating asset, similar to a rental property or a pension. Each month, the practice generates income. If the income is shared to pay alimony, then it might be unfair to divide the lump sum value of the practice in equitable distribution (which would be a double dip). Yet, if a practice has a high degree of personal goodwill, then the risk of double dipping is reduced, because the practice may not be divided as marital property. Instead, its income could be divided through an alimony order. This is one possible way in which spouses can be compensated for their interest in a professional practice.
Whether a professional practice is treated as an asset to be divided in equitable distribution, or as an income source to provide alimony, licensed professionals must consider how the added financial obligation will impact the practice. If you had to pay equalization payments or alimony in divorce, would the practice have sufficient cash flow to survive? The answer to this question might dictate the amount and duration of a divorce-related obligation for a professional practice in divorce.
For family law help in Western Pennsylvania, call Brian Vertz. He has more than 25 years of experience representing doctors, dentists, consultants, lawyers, accountants, insurance professionals – all kinds of licensed professionals – with complicated child support and divorce issues. His law firm is a powerful team of lawyers dedicated to family law. In Pittsburgh and Western Pennsylvania, call Brian at 412-471-9000.