How Is a Medical Practice Valuation Done in a Missouri Divorce?
A medical practice valuation starts with a credentialed valuator applying the standard approaches, and then Missouri layers on a proof rule for professional goodwill that is stricter than almost any other state’s.
That second step is the one most valuation reports miss, and it is the most valuable thing a physician can understand before an appraisal is commissioned.
The tangible side is the easy half. Equipment, accounts receivable, leasehold improvements, cash and debt can be identified and counted. The hard question is what the practice is worth beyond those things, which is goodwill, meaning the value of an established practice that exceeds its tangible assets.
Missouri limits how professional goodwill can be proved at all. Knowing that limit before the work starts is what lets you ask a valuator the right question rather than react to a finished report.
What Does Missouri Require to Prove Goodwill?
Market evidence, and nothing else will do.
Hanson v. Hanson, 738 S.W.2d 429 (Mo. banc 1987) arose from an oral surgery partnership, and the Supreme Court of Missouri defined divisible goodwill as “the value of the practice which exceeds its tangible assets and which is the result of the tendency of clients/patients to return to and recommend the practice irrespective of the reputation of the individual practitioner.”
Then it closed the door on how you prove it exists. “Evidence that other professionals are willing to pay for goodwill when acquiring a practice is, in our view, the only acceptable evidence of the existence of goodwill.”
Note the words only acceptable. Not preferred. Not best practice. The court then named the forms that evidence can take, requiring “evidence of a recent actual sale of a similarly situated professional practice, an offer to purchase the subject or a similar practice, or expert testimony and testimony of members of the subject profession as to the present value of goodwill of a similar practice in the open, relevant, geographical and professional market.”
Read the last seven words twice. Open, relevant, geographical and professional market. The question is not what medical practices sell for nationally. It is what a practice like yours commands where it operates, with your payer mix, your referral patterns, your staffing model and your patient demographics. A national database is background. It does not on its own satisfy this rule.
And the court said plainly what happens when the evidence is missing. “Divisions of marital property may not be based on speculation as to the very existence of the property being divided.”
That is why the goodwill question belongs at the start of a medical practice valuation rather than in a rebuttal report. An appraisal can be arithmetically flawless and still fail to address what Missouri actually asks.
Does That Rule Out Capitalizing Earnings?
As a substitute for market evidence, yes. As arithmetic inside genuine market evidence, no.
Hanson is blunt about the substitution. “We reject the use of capitalization formulae as a substitute for fair market value evidence of the value of goodwill in a professional practice.”
But footnote two of the same opinion preserves the other use. “We recognize that evidence of the fair market value of the goodwill of an entity may reveal that such value is the product of the application of a capitalization rate to the gross receipts or net income of the entity.” The court went on to say it does not reject capitalization to the extent it appears inside fair market value evidence.
Translated. An appraisal that capitalizes excess earnings into a goodwill figure and stops there is exposed in Missouri. An appraisal that establishes what comparable practices actually sold for, and then explains the multiple those transactions reflect, is doing something the court has expressly allowed.
That single distinction is the most useful thing to hand a valuator before a medical practice valuation begins.
Does the Strict Rule Apply to Every Business?
No. It applies to professional practices, and the difference matters if a physician owns more than the practice itself.
In In re Marriage of Brooks, 742 S.W.2d 585 (Mo. App. S.D. 1987), a machine shop case, the Southern District held that “we do not read Hanson, Graham and Taylor as rejecting all capitalization formulae as methods of valuing goodwill as an intangible asset of a commercial corporation or other business organization, no matter the nature of the business involved.”
Brooks also drew the boundary in a single sentence. “Manifestly no single method of valuing a business as a marital asset can be made applicable to every case, nor to the goodwill incident to that business, except where a professional practice is concerned.”
Note the exception at the end. That clause is where a medical practice sits and a billing company does not. A management services organization, a medical billing entity or a chain of urgent care clinics may present a different valuation question from the professional practice through which you personally provide care. Identify the entity structure during discovery rather than at trial, because a medical practice valuation and a valuation of the businesses around it may run under different rules.
What Are the Standard Valuation Approaches?
Three, and every medical practice valuation uses one or more of them. They are national valuation practice rather than anything Missouri family law mandates.
- The asset approach. What the practice owns minus what it owes, with book values adjusted toward reality. Useful for an equipment heavy practice, and it tends to understate one whose value sits in an established patient base, trained staff, systems and referral relationships
- The income approach. Historical earnings, normalized compensation, projected cash flow, then a capitalization or discount rate. This is the approach that runs straight into Hanson, because an income calculation alone does not prove professional goodwill exists
- The market approach. Comparable transactions and guideline companies. For the goodwill component of a Missouri professional practice this is the important one, because it speaks directly to what buyers have actually paid
Missouri names no mandatory formula. Most credentialed valuators build on IRS Revenue Ruling 59-60, issued in 1959, which outlines “the approach, methods and factors to be considered in valuing shares of the capital stock of closely held corporations for estate tax and gift tax purposes.” Its own section 3.01 contains the sentence everybody quotes, that valuation is not an exact science. The ruling is reproduced in full inside the IRS S corporation valuation job aid, and the IRS valuation of assets page collects the job aids themselves.
That ruling is federal tax guidance. It does not displace Missouri family law and it does not answer the Hanson question.
What Does Normalizing Compensation Mean?
Adjusting what the practice pays you to what it would have to pay somebody else to do your job.
This is where a large share of the money in a medical practice valuation actually moves. Physician compensation is often set for tax or business planning reasons rather than economic ones, and a valuator will restate it up or down to what hiring a replacement physician would cost.
The same review picks up personal expenses running through the practice. Some get added back to earnings, which raises the value, on the theory that they are not necessary to the practice and would not continue under a hypothetical sale.
Not every proposed add back deserves to survive. Each one turns on the records and the business purpose behind the item, and a report that raises earnings without explaining why each adjustment reflects the practice’s real economics is a report with a soft middle.
Worth knowing that the same normalized earnings figure reappears elsewhere. It shows up in the analysis of spousal maintenance, and our FAQ on divorce for physicians covers how the two interact.
Does a Buy Sell Agreement Set the Number?
Not automatically, and anyone who tells you a formula price binds a Missouri dissolution court is going further than the case law does.
Hanson itself treats a buy sell agreement as evidence rather than as an answer, saying that under certain circumstances such an agreement may be appropriate, and that the trial court is best suited to determine when one constitutes competent evidence of value.
The agreement still matters enormously, for reasons that have nothing to do with the number. It may show how the owners planned to handle a departing physician’s interest. It may set a valuation procedure, a payment schedule or a right of first refusal, and those provisions can govern what happens to the ownership interest whatever a court does with the price.
Collect it early, and collect all of it. The original document, every amendment, any side agreements, and any notices or offers made under it.
Who Is Qualified to Do This?
Somebody with a valuation credential and medical practice experience, because a CPA license on its own does not demonstrate either.
Three credentials show up in this work.
- ABV, Accredited in Business Valuation, issued by the AICPA
- CVA, Certified Valuation Analyst, issued by NACVA, which carries an examination requirement
- ASA, Accredited Senior Appraiser, issued by the American Society of Appraisers, which requires five years of experience
Here is the part almost nobody plans for. Hanson calls for testimony from members of the subject profession about goodwill in a similar practice in the relevant market. That is not the same thing as a valuator walking a judge through a spreadsheet. A medical practice valuation built to satisfy Missouri may therefore need a valuation expert and a physician witness who knows the local market, and which witnesses those are depends entirely on the facts.
When Is the Practice Valued?
At the date of trial, not the date you separated.
Taylor v. Taylor, 736 S.W.2d 388 (Mo. banc 1987) settled it in one sentence. “We hold that the proper date for valuing marital property in a dissolution proceeding is the date of trial.”
For a practice with moving collections that cuts both ways, so the date a medical practice valuation is prepared matters as much as the method. Growth while a case is pending is generally in the pot. A downturn is a reason to insist on fresh numbers, and a two year old appraisal report becomes a liability rather than an asset.
Expect the reason for the movement to matter as much as the movement. A change driven by a payer contract, a staffing loss or a market condition reads very differently from one driven by delayed billing, unusual expenses or a conveniently timed departure.
None of this has to be tried. Missouri Rule 88.04 provides that a court “may order mediation of any contested issue, including, but not limited to, child custody, parenting time, parenting plans, child support, maintenance, or property division.” Our FAQ on mediating a business valuation covers how that works in practice, and our mediation page covers the process generally.
What Does the Valuation Not Decide?
Four things, and blurring them is how a case turns into an argument about the wrong question.
It does not decide whether the practice interest is marital or separate. That is classification, under Section 452.330 RSMo.
It does not decide how the marital estate gets split. Section 452.330.1 RSMo directs the court to divide marital property in the proportions it deems just after considering all relevant factors, and just is not a synonym for equal. Our FAQ on dividing marital property covers that.
It does not decide who keeps practicing medicine. Ownership, control, licensing and your ability to see patients are separate questions.
And it does not turn your future earning capacity into a marital asset. Hanson drew that line itself. “Professional goodwill may not be confused with future earning capacity. We have not declared future earning capacity to be marital property.”
Classification, valuation and division are related. They are not the same, and keeping them apart is most of the work.
Ready to Talk Through a Medical Practice Valuation?
Missouri’s proof rule on goodwill only helps a physician who raises it early and supports it with the right evidence. Raised late, it is an argument. Raised first, it shapes the entire engagement.
Bardol Law Firm practices only family law. We work with valuation professionals, test the other side’s numbers, and handle property and asset division for families in St. Louis County, St. Louis City, St. Charles County and Jefferson County. You can read more about divorce for business owners, about high net worth divorce, and about property and asset division. The rest of our family law questions and answers cover the surrounding ground.
We do not provide valuation, accounting or tax advice, and a practice owner should have a valuation professional and a tax adviser in the room alongside counsel. Every client here has a named paralegal on the file, and we return calls from potential clients as quickly as possible, usually within minutes.
Family Law, Simplified.
If an appraisal has been ordered, or one has just landed on your desk, that is the moment to have it read carefully. Contact Bardol Law Firm or call 314.918.0100.
This page is general information about Missouri law and is not legal advice. Every case turns on its own facts. The choice of a lawyer is an important decision and should not be based solely upon advertisements.