In a Texas divorce, the marital estate is divided between the two spouses. The marital estate includes business assets that are owned by one or both of the spouses, so long as they are not subject to the terms of a prenuptial agreement or designated as separate property.
Medical practices have the same status as any other business when it comes to a divorce. The assets of the practice are subject to division, and the spouse who is not a doctor is still entitled to receive some portion of the practice because it can be considered a marital asset.
Medical Practices Are Divided Between the Spouses in a Divorce
Texas is a community property state. This means that property acquired during the marriage is jointly owned by the spouses. Usually, this means that property is evenly divided. Property that one spouse owned before the marriage could be treated as separate, but the issue is that the growth in value of a medical practice during the marriage is considered part of the marital estate. If one spouse owned the practice prior to the marriage, they are best off when they designate it as separate property, even if community property laws would dictate otherwise. This would give them the most possible protection.
It does not matter that one spouse worked in the practice while the other did not. By virtue of being a married couple, the other spouse has a share in the marital estate. They did have a part in building the practice because they were a spouse, just like they share in every other accomplishment in the marriage. There are also a variety of other issues that can impact physicians during a divorce in Texas.
Divorce Could Impact a Partnership
The spouse who owns the medical practice will have challenges in the divorce because their spouse also owns a part of it. This is even more difficult if the doctor is in a partnership with other doctors. It is usually easier to deal with splitting marital property interests in solo practices. Partnerships could dissolve if one partner pulls out, and a change in ownership could trigger certain provisions of the partnership agreement.
Options for Dividing Ownership of a Medical Practice
Of course, there would be a number of difficulties giving an ownership share in a medical practice to a non-doctor. There is a law in Texas that prevents corporate ownership of a medical practice. Only physicians are legally allowed to run medical practices. Someone without medical training cannot be an owner of a medical practice. Doctors will never be forced to co-own a practice with their spouse if they do not want to, even if they are both doctors. Courts won’t compel two people to be in a business venture together against their will.
If the husband and wife practice together, this is not as much of a challenge, although they may not want to remain in a joint business after a divorce. There are two more likely scenarios when a medical practice needs to be divided.
The first is selling the medical practice in its entirety to a third party. The proceeds will then be split among the two spouses. Neither of them will own the practice, so this will comply with Texas law. However, a doctor who has spent their professional life building their practice may not want to give up control of their life’s work because of a divorce. This is usually not the preferred option.
Buying Out the Interest of the Non-Doctor Spouse
The most common scenario for dealing with a medical practice as part of a divorce is the spouse who owns the practice buying out the other. They would make a payment based on the value of the practice in order to keep ownership of the entire practice or compensate the non-doctor spouse with other assets of corresponding value. This enables them to keep working, and the other spouse to receive what they legally deserve. The doctor could either make a cash payment or give the other spouse more of the other assets in the marital estate. A doctor may get some leeway to pay their spouse over time because a judge may not expect this payment to be made immediately. After all, a judge will generally not take action that puts a doctor out of business.
Valuing a Medical Practice Presents Difficulties
One of the biggest challenges in dividing a medical practice due to a divorce is the difficulties in valuing the business. The payment that the physician spouse will make will be based on the current valuation of the medical practice. Naturally, each spouse will have their own view of how much the practice is worth based on their own self-interest. Here are some of the challenges in valuing a medical practice:
- There are different approaches to use when valuing a practice, including the fair market value approach, the cash value method, and the asset approach.
- Medical practices have expensive and complicated machines that may be difficult to value.
- There are intangibles, such as goodwill, that are part of the practice’s worth but are subjective measures.
- Valuing a practice does not just account for assets but also includes the debts and other contracts of the practice.
- Using other practices that have sold recently as a guide for valuing a particular practice can be tricky because their values could have been driven by factors unique to them.
- The value of the practice may change during the divorce (the other spouse is entitled to an increase in the value between the dates of separation and divorce)
Each spouse will likely have their own business valuation expert who paints starkly different pictures of the medical practice’s value. If the two spouses cannot agree, a court will ultimately decide the matter, and the trial could be complex and costly.
Although the difficulties around dividing a medical practice during a divorce could be avoided by acting before the marriage with a prenuptial agreement or even after marriage with a post-nuptial agreement, many doctors start their practice after they marry. When that occurs, they can expect their divorce to be complex given the issues described above. Both spouses will need an experienced Texas divorce attorney that retains a business valuation expert in order to protect their financial interests. They should be open to compromise given the potential for costly litigation that could disrupt the practice and jeopardize its success.
To schedule a consultation, contact us today. Our Brazoria County, Texas family law attorneys are ready to help.