Doctors and Lawyers Beware! Valuing Medical and Legal Practices in Divorce
It’s one thing to buy out a spouse’s interest in a house. The house can be sold to provide liquidity, and the proceeds can be divided. If one spouse wants to buy out the other’s interest, the price can often be determined based on the sales of similar homes in the community. Frequently, differences in opinions about a home’s value are narrow.
But a professional practice is different. There is an intangible component of the value of a professional practice that usually can’t be transferred, devised, or inherited. It’s called “goodwill.” And valuations of goodwill can vary enormously.
What is goodwill? It’s sometimes defined as the part of business value over and above the value of identifiable business assets. The courts in both Maryland and the District have ruled in divorce cases that professional practices have goodwill that can be included in the division of assets in a divorce.
Courts define two components of that goodwill. There’s personal goodwill, which relates to the skill and reputation of the individual professional. There’s also practice goodwill—the firm or practice’s value apart from that of that professional. Practice goodwill can be based on such things as the institutional reputation, location, track record, name recognition and operating procedures that result in the entity’s earnings. Courts and valuation experts, however, have great difficulty in differentiating personal good will from practice goodwill.
Maryland and District courts have struggled to define equitable ways to measure professional goodwill. They have ruled in cases about a solo law practice, a multi-member law firm, an oral and maxillofacial surgery practice, an anesthesiology practice, and other professional practices.
So lawyers and doctors beware. In a divorce, a professional might have to pay money to a spouse based on the value of goodwill, even though the professional him or herself might never receive any money for this intangible in the real world.
This is not legal advice. Please read our "disclaimer" to understand why this information is not a substitute for legal advice.