In Texas and many other states, assets and liabilities acquired during a marriage are considered community property owned equally by both spouses. In divorce, this community property is subject to equitable distribution.
Property Division in Texas
Property division is a significant part of the divorce process. In Texas, marital property is divided between the spouses. In general, marital property includes assets owned jointly like a house or joint bank account.
A business, including a medical practice, established after the date of marriage may also be considered community property and subject to equitable division in the event of divorce.
If a medical practice is included in the marital assets, however, be aware that ownership of the medical practice cannot be divided – only the value of the practice. This is due to Texas’ Corporate Practice of Medicine doctrine which bans non-physicians from owning a medical practice.
What Is Texas’ Corporate Practice of Medicine?
The Corporate Practice of Medicine (CPOM) doctrine is a legal doctrine in Texas that prohibits corporations, entities, or non-physicians from practicing medicine. Under this prohibition, non-medical professionals may not own a medical practice nor employ physicians for private gain. This rule is part of the Medical Practice Act contained in the Texas Occupations Code and establishes strict regulations to maintain independent practices and protect the doctor-patient relationship.
If one spouse is licensed to practice but the other is not, granting any ownership shares in the practice to the non-physician spouse would be a violation of the Corporate Practice of Medicine doctrine. Violating the CPOM could result in disciplinary action including fines and license suspension.
Options for Dividing Ownership of a Medical Practice During Divorce
How ownership is divided depends on each spouse’s circumstances. In some cases, it is easier to sell the practice in its entirety to a third party. If spouses choose to sell, the proceeds will be split between them and neither party will retain ownership of the practice.
Another option involves buying out the interest of the non-physician spouse. A physician may buy out their spouses’ share in the practice to retain ownership and dissolve business ties with their former spouse. The physician would make a payment based on the value of the practice using liquid assets, cash, or a larger share of other marital property.
In some cases, a judge may permit a physician to purchase their spouses’ share of the practice over time by paying in installments. Judges typically prefer to keep medical practices in business which gives leeway to different payment arrangements.
What If the Physician Spouse Is in Partnership With Other Physicians?
If the physician spouse is in partnership with other physicians, a divorce could trigger a buy-sell provision if one is included in the partnership agreement. Buy-out provisions specify the circumstances or events under which one partner can force the other to leave the partnership and usually sets rules for valuing the departing partner’s shares. Divorce is often one of those triggering events.
If there is not a buy-sell provision in place, the divorcing physician may be able to compensate the non-doctor spouse with assets of corresponding value to preserve the partnership.
Valuing a Medical Practice During Divorce
Before a physician can buy their spouse’s interest in the medical practice, the practice must be valued to determine a dollar amount. Typically, a business valuation expert is called in to conduct the valuation. There are several methodologies a valuation expert may employ to determine the value of the medical practice, based on fair market value estimates, annual income, or other metrics.
Fair market value establishes a price based on what a hypothetical buyer would pay in congruence with the market. However, fair market value fluctuates depending on the economy and may be less than what the spouses believe their practice is worth.
Cash or income value is the measure of the practice's current and future projected income. Valuing a practice on its earnings involves using either a flat revenue percentage or a formula to produce a price.
- A flat revenue percentage is simply a multiplier of the practice’s annual gross income.
- A formula-based income approach evaluates the expected income of the practice by reviewing cash-flow patterns, risk assessments, and return on investment.
Goodwill is factored into the value of the medical practice. When valuing a medical practice, goodwill is the potential benefit to the community and the physician’s reputation. Goodwill is an intangible measure of value and can be affected by factors such as the physician’s experience, age, specialization, the potential for growth, and location. If a practice has a high goodwill value, the total value of the practice may exceed basic standards like fair market value.
An independent valuation expert can advise on the best methodology and help you determine the value of your practice.
Keep in mind that if your spouse hires their own valuation expert, you may come up with vastly different values. The judge has the discretion to ask your experts to testify in court to determine the reasonableness of their opinions. For this reason, it is important to consider a valuation expert with litigation experience.
Divorce-Proofing Your Medical Practice
There will always be risks involved in dividing a medical practice, but precautions could save time and valuable resources.
Physicians with spouses should consider the following preventative measures to divorce-proof their medical practice:
- Include specific directives for ownership of the practice if a physician partner dies, files for divorce, or becomes incapable of maintaining the business
- Maintain thorough and accurate financial records
- Keep all personal and business accounts separate
- Include a buy-sell provision in partnership, ownership, or shareholder agreements
- Keep partnership compensation competitive; otherwise, a good divorce attorney will make the case that more of the business assets should be designated as marital property
- Include specific language regarding the practice in a prenuptial agreement
There are no guaranteed ways to prevent medical practice division but taking precautions to protect your personal and business interests can lessen the duration and cost of a divorce.
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At Hendershot Cowart, P.C., we are on your side. Contact our firm today for more information.
