The Dental Laboratory Owner’s Divorce Proceedings
Value considerations for dividing assets
Bruce Bryen, CPA, CVA
While there are many situations that require dividing a laboratory's assets, a very common reason is due to the end of the owner's marriage. The laboratory owner who has a successful business venture with good profits and a nice lifestyle may be thwarted from reaching a reasonable conclusion of a divorce regarding the value of the dental laboratory and any distribution. One of the primary topics in most states is the question of the goodwill of the laboratory and whether the allocation of that goodwill is of a personal nature or whether it belongs to the enterprise itself. Goodwill is an extremely valuable asset; if the allocation is more heavily weighted toward the laboratory, it becomes enterprise goodwill, which is available for distribution to the spouse in an equitable distribution state. Most states have equitable distribution rules in effect for the transfer of the laboratory asset value in a divorce proceeding. The court’s conclusion in an equitable distribution state is not necessarily one meaning that the award is equal. It can be evenly divided, but the valuation of the laboratory by the skilled professional evaluator may be enough to convince the judge that the asset should be distributed in a way that is much more supportable for the owner of the laboratory. Some of the reasons would be the skill and efforts of the owner so that the goodwill allocation is of a personal nature and not a marital asset, as the laboratory goodwill itself would be.
Other Distribution Guidelines
The award in a community property state would be an equal distribution of the asset value of the dental laboratory to each spouse. The guidelines used by the courts in a common-law state are similar to that used in a community property state in that the distribution or award to the non-owner spouse is equal to that of the spouse who is the owner of the laboratory. The appraisal of the laboratory assets and income presents a value but that value is to be shared equally among the spouses. Judging the income and its resultant future value to the laboratory and subsequently to its owner is an item of discussion and analytical presentation for the expert evaluators. They will try to convince the court that the consistency is either there or not and that a discount should be awarded to reduce the future value of the stream of income, enhance it or leave it as is. The stream of income is based on the supporting evidence presented by the evaluators for each side of the argument.Issues such as the expected rate of return, federal and state tax rates, and the capitalization of the income stream are resolved either by agreement or by the courts. If the conflict can be settled by mediation rather than by a court, that is almost always less acrimonious and many times cheaper than a court proceeding, which typically involves attorneys, expert evaluators, and other financial advisors assisting each spouse. The cost, time, effort, and aggravation involved with that type of resolution are extraordinarily high.
An important item that should be addressed at the laboratory is any state-of-the-art equipment, leaseholds, technology, and the future need for replacement of those items. The cost and the date of that future replacement is necessary in order to understand the present value of the amount of money to be subtracted from the value of the laboratory. This is a critical item since effectively it is an unrecorded liability of the laboratory for the use of the current equipment’s phase-out or replacement date with newer, probably more expensive substitutes.
The laboratory hopes to maintain its reputation as one of the best, using the most state-of-the-art equipment available and most expeditious service to its clients while the divorce and the financial settlement arrangements are pending. There are very few instances where the equipment of the laboratory is not a marital asset. Since those assets are part of the laboratory and typically owned by the laboratory, the ability of the owner to attempt to allocate the equipment to themself is an extremely complex endeavor. There are sophisticated ways for the owner to hold the title to the equipment, which would create a cloud on whether the equipment was a marital or non-marital asset, but it is quite detailed in scope. That type of arrangement also would have been accomplished prior to any of the proceedings of a divorce. If any type of transfer were to occur after the onset of the divorce proceedings, the suspicion would become one that it was being done for the purpose of the divorce only. Without a specific legitimate business reason for any asset or income transfers occurring during the divorce proceedings, a serious question of doubt into the owner’s credibility would be raised. If the owner’s trustworthiness is in jeopardy, a court may take a much closer look at all of the presentations of the owner.
Basis of Value
It is typical for any small business owner, especially one involved with large capital expenditures needed for the acquisition of equipment such as a dental laboratory, to have presented financial statements to lending institutions. A careful review is needed of whatever has been offered to a lender for support of income or asset value when attempting to borrow money. It is not just the collateral that the lender considers when deciding whether to grant the loan; it is also the ability to repay it. The other assets that can have liens filed against them for the protection of the bank are also additional collateral for the bank. It is not a good idea to vary the presentations of the income or asset value already shown on accounting presentations or the laboratory letterhead. This is another example of the potential loss of credibility since those records held by lenders can be subpoenaed and presented as proof in the owner’s records of a higher value than that owner may now be attempting to use as evidence to the court during a divorce process.
Finalizing the Approach to the Financial Settlement
If an expert is going to be used for the presentation to the court or at a mediation hearing, a smart laboratory owner tells that evaluator everything; that way there are no surprises when the testimony is given in front of a judge or other decision-maker. If the divorcing spouse knows something that the dental laboratory owner’s representatives do not, it will create a difficult financial time for the owner. If the evaluator is prepared, at least they have the ability to find something to overcome a potential problem because there will be time to resolve it. The problem probably will not have an opportunity for resolution if the evaluator is surprised to hear something for the first time. As with all financial dealings, straightforward honesty and preparation are the best methods.
About the Author
Bruce Bryen, CPA, CVA, is the principal in the firm of RKG Tax and Business Services, LLC, in Fort Washington, Pennsylvania.