All assets created from funds earned during the marriage, will be considered marital and divided equitably in Ohio. This includes a professional practice, such as the medical practice, accounting practice, architect practice, engineering practice and legal practice. For purposes of this article we will be discussing the medical practice. In order to determine how to divide the value, obviously a valuation of this asset must be done. Unique to this matter is the government-driven reimbursement and regulatory environment in which the medical field practices. This environment is constantly changing and affects every aspect of a medical practice.
In making the valuation of the medical practice, the valuator should consider the following:
- Collecting and analyzing data appropriate for the valuation engagement;
- Determining the earnings/replacement cost for services of the physician;
- Analyzing the medical practice’s historical income statements for at least the past 3 years ;
- Determining the normalized earnings amount; and
- Reviewing the medical practice’s balance sheet as of the appropriate valuation date and include adjustments to fair market value of the medical practice’s accounts receivable, fixed assets, supplies, equipment, etc.
While there are several accepted methods of valuing a medical practice, the choice of method should be ruled in part by the purpose of the valuation report, in this case the purpose being for monetary division in a divorce. Some accepted methods for general valuation of a medical practice include:
- Discounted Future Benefits Method
- Discounted Net Cash Flow Method
- Excess Earnings Method
- Direct Market Comparable Transactions Method
- Guideline Publicly Traded Company Method
- Market Data Intangibles Comparable Method
- Prior Transactions Method
Further, in consideration of the valuation of the medical practice, a review of the physician’s original “buy-in” into the practice should be reviewed. Does this “buy-in” number include sweat equity, which means that young Dr. Smith’s value of his labor in the practice is considered as part of the cost of his equity interest, thus making his “buy-in” appear low? Was there a lower salary paid to Dr. Smith than to his other professionals in the practice, however the hours worked by all physicians are the same, the levels of experience the same, etc. In the event of the existence of sweat-equity, can the value of Dr. Smith’s medical practice be valued? Yes, following the valuation formulas, this can be accomplished after a review of necessary documentation.
Whether there exists sweat equity or not, certain documentation must be reviewed by the medical practice valuator. These documents include:
- Financial statements and tax returns for at least the past 5 years
- Fee schedules for office, hospital and lab as of the date of valuation
- Aged accounts receivable schedule with payor detail
- Inventory of medical equipment and office equipment (yes, furniture and fixtures,
- Actual count, or estimate , of active patient charts active within the past 2 years against estimate of total patient charts in total
- Estimate of number and type of major/minor procedures performed in the office and at the hospital within past year
- List of number and type of lab and diagnostic tests and procedures performed within past year
- Description and list of referral sources and referring physicans
- Copy of all agreements, employment, partnership, shareholders, buy/sell, consulting, management, and income distribution plans
- Copy of insurance policies, including Declaration Page
- Copies of managed care contracts
- If real estate owned, all documents related to same
- Copies of leases
- CV of all physicians in the medical practice
Practice tip to single physicians, engineers, accountants, lawyers and other professionals: GET A PRENUPTIAL (ANTENUPTIAL) AGREEMENT BEFORE YOU GET MARRIED, AND REQUIRE YOUR PARTNERS TO DO THE SAME, THUS PREVENTING THIS FROM HAPPENING IN THE FIRST PLACE !!!