Divorce for Dentists, Is My Practice Goodwill Divisible?
Part of it, and Missouri’s leading case on the question came out of a dental practice, which makes this one of the few professions with authority almost exactly on its facts.
Hanson v. Hanson, 738 S.W.2d 429 (Mo. banc 1987) arose from an oral surgery partnership in Jefferson City. Two practitioners, a partnership agreement, and a dispute about what the practice was worth beyond its equipment. If you own a dental practice in Missouri, the controlling case in a divorce for dentists is about a dental practice.
What Did Hanson Actually Hold?
That goodwill in a professional practice acquired during a marriage is marital property, and then it defined the term narrowly.
The court defined goodwill “within a professional setting to mean 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.”
Read the last clause twice, because it is the whole argument for a dentist.
If patients return because of the location, the hygienists, the recall system, the records, the referral relationships from general dentists and the name on the door, that value could transfer to a buyer and it is divisible. If they return because of you specifically, because of your hands and your chairside manner and thirty years of knowing their families, that value walks out the door when you do and it is not.
In a divorce for dentists the honest answer for a solo practice is often that a great deal of the value is the second kind. For a multi operatory group with associates and a hygiene program, more of it is the first.
Does That Mean My Earning Power Gets Divided?
No, and Hanson says so in terms.
“Professional goodwill may not be confused with future earning capacity. We have not declared future earning capacity to be marital property. We do not now do so.”
That refusal is categorical and it is unusual. Several states treat a professional’s earning capacity as something a court can reach. Missouri has declined to.
Your dental degree and license are also not marital property. In Riaz v. Riaz, 789 S.W.2d 224 (Mo. App. E.D. 1990), the Eastern District stated that “Missouri courts have not recognized that an educational degree, or a professional license secured as a result of such education, constitutes marital property subject to division by the court in a dissolution proceeding.”
The honest qualification, from Sullivan v. Sullivan, 159 S.W.3d 529 (Mo. App. W.D. 2005), is that a spouse’s contribution toward the other obtaining a professional degree may be considered in making an equitable division, and where warranted “the contributing spouse may be awarded a higher percentage of the property that is properly classified as marital.”
What Does the Other Side Have to Prove?
Market evidence, and only in three forms.
This is the part of Hanson that most valuation reports do not account for, and it is the strongest procedural position a Missouri dentist has.
The court held that “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,” and that goodwill “is shown only when there is evidence of a recent actual sale of a similarly situated professional practice, an offer to purchase such a practice, or expert testimony and testimony of members of the subject profession as to the existence of goodwill in a similar practice in the relevant geographic and professional market.”
Three things follow in any divorce for dentists.
- The comparison is local and it is dental. The relevant geographic and professional market, not a national database of small business transactions
- It usually takes two witnesses. A valuator, plus testimony from members of the profession about goodwill in a comparable practice. That second witness is frequently missing
- Absent that evidence the court said the answer is nothing. “Divisions of marital property may not be based on speculation as to the very existence of the property being divided”
Can They Just Capitalize My Earnings Instead?
Not as a substitute for market evidence, and the qualification matters.
Hanson holds that “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 2 of the opinion preserves capitalization where it sits inside market evidence. The court recognized that fair market value evidence “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,” and said that “to the extent that fair market value as shown by the evidence includes such a product, we obviously do not reject it.”
So the attack is precise rather than general. An appraisal that runs an excess earnings capitalization and calls the output goodwill is exposed. One that establishes what dental practices like yours actually sell for in this market, and shows the multiple those transactions imply, is not.
Can My Spouse Own Part of the Practice?
Not as a functioning owner, and Missouri’s dental practice act routes the question through the professional corporation statute.
Section 332.081.3 RSMo provides that “no corporation shall practice dentistry as defined in section 332.071 unless that corporation is organized under the provisions of chapter 355 or 356,” subject to a narrow nonprofit exception.
That points to the professional corporation statute. Section 356.111.1 RSMo permits shares to be issued only to licensed natural persons and certain qualifying entities, which makes a non dentist spouse a disqualified person.
Section 356.111.3 voids transfers to unqualified holders but carves out that “nothing contained in this subsection shall prohibit the transfer of shares of a professional corporation by operation of law or court decree.” So a decree can move them.
What happens then is tightly controlled. Section 356.151 RSMo provides that a disqualified shareholder “shall not be entitled to hold any office or be a director in the corporation, render any professional service of any kind for the corporation or its customers or clients, or receive dividends on or be entitled to vote such shares.” And Section 356.141.6 RSMo automatically cancels the shares if a purchase, redemption or transfer is not completed within six months, leaving only a right to payment.
None of that displaces the licensing side, since Section 356.191 RSMo provides that the professional corporation law does not “restrict or limit in any manner the authority and duty of any licensing authority,” which here means the Missouri Dental Board.
What About Control Over Clinical Decisions?
Missouri’s dental act addresses that directly and it is worth knowing about.
Section 332.081.5 RSMo provides that “a dentist shall not enter into a contract that allows a person who is not a dentist to influence or interfere with the exercise of the dentist’s independent professional judgment.”
Section 332.071 RSMo also defines a person as unlawfully practicing dentistry who “controls, influences, attempts to control or influence, or otherwise interferes with the dentist’s independent professional judgment regarding the diagnosis or treatment of a dental disease, disorder, or physical condition.”
So a settlement structure that gave a former spouse any say over how the practice is run is not merely awkward. It runs into the practice act.
What If My Practice Is an LLC?
That is a gap in the statutes rather than a settled answer, and we are flagging it rather than filling it.
Section 332.081.3 speaks of a corporation, and Section 332.081.4 of an unincorporated organization. Neither addresses a limited liability company practicing dentistry. Missouri’s LLC statute, Chapter 347, contains no professional limited liability company form and no membership restriction based on licensure.
We could not find text resolving whether or on what terms a dental practice may be conducted through an LLC, or what happens to a membership interest awarded to a non dentist. Confirm the current position with the Missouri Dental Board and with your own business counsel rather than relying on any website.
What does apply to an LLC interest generally is Section 347.115.1 RSMo, which provides that an assignment of a membership interest “does not entitle the assignee to participate in the management of the business and affairs of the limited liability company,” and that a non member assignee “shall only be entitled to receive, to the extent assigned, the share of distributions and profits.” Section 347.119 RSMo takes a similar approach to a judgment creditor, allowing a court to charge a member’s interest with payment of the judgment rather than handing over the membership itself.
What Should I Do First?
Find the documents, and find any prior offer before anybody commissions an appraisal.
That is the first practical step in a divorce for dentists, and it costs nothing but an afternoon.
- The entity documents. Articles, bylaws or operating agreement, shareholder agreement, every buy sell provision and amendment
- Any prior valuation, offer to purchase or letter of intent. That is exactly the market evidence Hanson asks for, and dental practices receive unsolicited offers more often than most
- Associate and hygienist agreements, because a practice that runs without you is worth more and is more divisible
- Three to five years of returns, production reports and collections
- Equipment schedules and the lease, since a dental practice is more asset heavy than most professional practices
Our page on divorce for business owners covers the wider records question, and our FAQ on whether a business is marital property covers the classification side.
What Does the Goodwill Question Not Decide?
Three things.
It does not decide whether the practice is marital or separate, which is classification under Section 452.330 RSMo. It does not decide how the marital estate is divided, which asks for proportions the court deems just. And it does not decide who keeps practicing, which in a solo dental practice is rarely in doubt.
Our FAQ on dividing marital property covers the division factors.
Who Can Help With Divorce for Dentists in St. Louis?
Missouri’s controlling goodwill case came out of a dental practice, which means a divorce for dentists starts from better authority than almost any other professional has, and it only helps if somebody raises it.
Bardol Law Firm practices only family law and handles property and asset division for dentists and other professionals in St. Louis County, St. Louis City, St. Charles County and Jefferson County. You can read more about high net worth divorce, about property and asset division, and the rest of our family law questions and answers.
You should not have to chase your attorney for basic updates. Every client here has a named paralegal on the file, and we generally return calls within one business day.
Family Law, Simplified.
If an appraisal of your practice is coming, the proof rule is worth understanding before it is written rather than after. Contact Bardol Law Firm or call 314.918.0100.
This page is general information about Missouri law and is not legal advice. Bardol Law Firm practices family law only and does not provide valuation, tax or professional licensing 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.