In a divorce, either or both spouses may own a professional practice or have an interest in such a firm – whether it be law, medical, dental, orthodontic, accounting, tax or another specialty. Connecticut law gives judges wide discretion in making decisions involving distribution and valuation of professional practices. A litigant in this position should present strong and detailed evidence as well as arguments to educate the court about the outcome the litigant prefers and why it would be equitable.
A professional practice is marital property subject to equitable distribution
In Connecticut, the scope of property subject to division in divorce is relatively broad and includes property owned jointly or by either spouse individually. Our courts have consistently classified ownership interests in professional practices as marital assets subject to distribution. However, distributing a medical practice or accounting firm is obviously much more complex than dividing a bank account.
Logistically, the judge has many ways to approach division of a professional firm – and they may even devise a new way to do so if it would be fair and desirable under unique circumstances. One option among many is ordering the parties to sell the practice (either as a going concern or by winding it down, depending on the profession and circumstances) or divide the proceeds or apply them toward liability. Another might be to award the practice to the litigant with an ownership interest in the firm, but order that the other litigant receive a lump sum, ongoing payments or other assets as credit, if appropriate.
Distribution of the practice may involve a complicated combination of factors
The litigant must make decisions about the outcomes for which they wish to advocate in court. Professional, personal and family issues can add complexity to distribution questions. For example, what if both litigants had ownership interests in the professional firm or they were in a partnership together? Disentangling an arrangement like this may be difficult but continuing to work together or having shared ownership in the same firm once divorced would be intolerable for many, but not necessarily all, litigants.
The legal structure may impact the options for distribution. Is the practice a sole proprietorship, partnership, limited liability company (LLC), corporation or another legal entity? Do they want to continue to practice their profession at the firm or do they want to leave to work elsewhere or retire? Is it a family business with both economic and emotional importance to one spouse and are there broader family considerations?
Determining valuation of the professional practice is crucial before the judge can determine fair distribution. Usually, each litigant utilizes an expert witness like an appraiser, accountant or commercial real estate broker to establish the value of the firm or of the spouse’s interest in it. The choice of expert and their valuation method are extremely important as this will be key evidence for the judge.
A valuation consultant familiar with current economic trends impacting the profession as well with local competition and other relevant factors unique to the practice can be crucial. Sometimes the testimony of the litigant-professional themselves about the firm’s worth is helpful to the court, and the judge may use their own general knowledge. If the court finds it necessary, it can appoint an expert of its choice in the case of its choice. Connecticut Practice Book, Sec. 25-33.
We previously posted detailed information about business valuation in Connecticut divorces. For example, when deciding property division (and alimony) issues, the court has the discretion to choose an appropriate valuation method and may consider a variety of factors. Potential valuation methods use fair market value (FMV), capitalization of income or liquidation estimates.
Our courts have adopted a standard for valuation methods in divorce proceedings from eminent domain cases. Namely, a judge’s valuation decisions are “reviewable only if he misapplies, overlooks, or gives a wrong or improper effect to any test or consideration which it was his duty to regard.” See Turgeon v. Turgeon, 190 Conn. 269 (1983), quoting Greenfield Development Co. v. Wood, 172 Conn. 380 (1977).
Of course, valuation (and distribution) factors are sometimes dependent on the structure of the practice and who is involved. By illustration, analysis of a professional firm closely held by related family members will differ from that of a partnership of unrelated people.
Goodwill may increase value of a professional firm
Goodwill is an intangible factor that may add value to a firm beyond its tangible assets. For example, has the location or quality of service created client loyalty or a reputation for excellence without which the firm would not be as successful? This adds intangible value. Similarly, it is relevant to a practice’s value if the litigant him or herself adds goodwill to the practice – such as when their professional skill and reputation adds value to the business by bringing in clients or supporting higher fees.
Due consideration of salability and price in excess of tangible assets for goodwill is important. “Its value, however, must be determined on the basis of the price that a willing buyer would pay in excess of the tangible assets to acquire the practice.” Eslami v. Eslami, 218 Conn. 801 at 814 (1991). Goodwill that requires the continuing personal presence of the practitioner is not a separately marketable asset. Moreover, professional goodwill evaluated as a detached marketable asset, rather than mere enhancement of earning capacity, reduces to prospect of double-dipping — counting the same financial basis in calculating alimony and the distribution of assets.
Experienced legal counsel is critical
Even when two spouses ask the court for the same outcome, the court can do something else if it finds it equitable. See Callahan v. Callahan, 157 Conn. App. 78 (2015). In that case, both litigants asked the court to order the sale of their businesses, but it was still within the bounds of the judge’s discretion in awarding the companies to one spouse with orders for money distributions to the other contingent on whether the businesses were retained or sold.
Complex divorce litigation involving a professional practice requires sophisticated and careful preparation, investigation and presentation. The breadth of the judge’s discretion in distributing and valuing the firm makes the outcome uncertain so the lawyer’s experience and skill can make a real difference.