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The chaos of the COVID-19 pandemic has caused legal professionals to revisit some of what we thought were constants in the divorce world, one of those being that medical professionals had “guaranteed” income. For many professionals, their practices came to a halt in the midst of the global pandemic. Radiologists had fewer images to review, orthopedic surgeons had fewer knee surgeries to perform as their patients lived with pain while waiting for access to outpatient “elective” procedures, and suspension of routine procedures like vasectomies brought urological practices to a near standstill.
This standstill extends beyond the hospital: your smiles have taken a back seat, too. The workload of dentists has been significantly reduced as they only treat emergency matters. Practitioners have also been at the mercy of PPP loans and, for many, that means furloughing dental staff.
This pandemic came at a time when marketing and competition in dentistry made guarantees of financial success with a DDS behind your name a thing of the past. Years ago, graduation from Dental School was seen as a ticket to a four-day work week and good tee times. With the industry now inundated with heavy marketing and lead-generation companies, dentists must become business managers instead of focusing just on their medical craft.
Still, the divorce rate among dentists is higher than the national average
Despite these market challenges—or perhaps because of them the divorce rate among dentists remains higher than the national average and those divorces are often complicated. This is due to the complications that may arise when dividing a dental practice. The practice itself must be appraised and either sold or equalized in the divorce. The practice may also own real estate and could be attractive to newer dentists eager to expand or buy into an existing client base.
What makes valuing a dental practice unique?
What makes dental practices different from other medical practices is the salability factor. In theory, this marketplace mentality makes valuing the practice easier. After all, isn’t it worth what someone would pay for it, like the value of a used car? Not necessarily in the realm of divorce. The reality is that the practice may be worth an amount significantly different from the broker’s value, which was based on different factors than those used by the courts.
Dentists, perhaps more than any other group of medical professionals, rely on their reputation and patient experience to secure business. The better the reviews, the better the business. So many people fear visiting the dentist, and a pleasant experience is both a relief and a high likelihood that the patient will return to the same office, or dentist, for future care. Hopefully, that same patient will introduce the dentist to their friends or colleagues. This phenomenon is often referred to as “good will.” Good will may be attached to the dental office or to the individual practitioner, such that even dentists who do not operate their own practices may have their own good will within the community which can then be assigned a value and divided as an asset.
In Arizona, the good will that a practitioner develops over the course of his or her career is considered when determining the value of a practice during asset division. In Wisner v. Wisner, the Arizona Court of Appeals laid out some of the factors which courts should consider when determining the existence and value of professional good will. These factors include the practitioner’s age, health, past earning power, reputation in the community for judgment, skill, and knowledge, and his or her comparative professional success.
A dentist who has performed quality services for a long time may have generated a substantial amount of good will with patients, and that good will may significantly impact the legal value of that dentist’s practice during divorce proceedings.
Evaluators may also consider the practice’s assets and income, which can include contractual agreements with insurance providers, relationships with current patients (particularly when patients require long-term care for endodontic implants, etc.), the average number of new patients that the office treats each month, among many other factors. Some dental practices have passive income from providers who rent space from the dentist to provide collateral services (like an orthodontist who comes in on Tuesdays and Thursdays or an anesthesiologist who participates in dental surgeries as a third-party provider)
In addition, the value of a dental practice may be subject to adjustment because of its locale and the rates of recent sales of similarly situated practices. This means that a dental practice located in North Scottsdale may be more valuable than similar practices in Flagstaff or Tempe. Even ‘non-competition’ agreements with past partners or employees of the practice may be assigned a value for property division purposes.
Equipment, supplies and recurring revenue
While we have seen divorces where the focus of the business evaluation is mostly on the income stream, the business might also have fungible assets of significant value. If an X-Ray machine or other medical devices are owned (as opposed to leased), that equipment needs to be valued.
Some practices are now offering subscription-based services, such as retainers, and insurance products on cosmetic items like veneers. These recurring sources are tremendously valuable because they represent a known revenue stream and passively support the practice. Accordingly, recurring revenue is calculated as part of the value of the practice in a divorce (assuming that the accounts are transferrable).
What do the financial pros say?
We asked Larry Mathis, who is a Certified Financial Planner in Phoenix and the author of Bridging the Financial Gap for Dentists, what advice he would give a dentist dealing with divorce.
Larry Mathis, CFP®: I have been helping the dental community navigate financial matters for better than three decades. I have helped scores of dental professionals throughout the U.S. develop financial plans based on the things they value most, which incidentally aren’t usually “things” at all, but in reality more the emotional payoffs in life, like peace of mind, and making a difference in the lives of others.
It is always challenging when a client tells me that their marriage is ending in divorce. You asked what advice I’d give them? I remind them that bitterness and resentment in a divorce is only going to benefit the lawyers. Yes, divorce is painful both personally and financially, so they should work to minimize the pain! That means to go through the process with a desire to achieve a healthy resolution that hopefully preserves as much of the family assets as possible. That only happens when reasonable minds (and reasonable attorneys) prevail. The key is to look to the future and focus on the best outcome for everyone involved. As difficult as divorce as it’s important to know what is really important. Of course, an equitable financial outcome is one goal, but so should be the emotional well-being of the people involved.
With this in mind there are some additional practical items that need to be addressed. First of all, it’s vital that everyone involved know the answer to these three questions:
1. What do we own? (Assets)
2. What do we owe? (Debt)
3. Where does the money go? (Expenses)
Candidly, these are questions that every couple should know the answers to during the entire marriage, but let’s be realistic: that is rarely the case. However, during a divorce, answering these questions is vital. It’s also very important that not all assets, debt and expenses are equal. For instance, Individual Retirement Accounts (IRAs) are not all taxed the same. Traditional IRAs are tax deferred vehicles, and distributions will be taxed when the money is taken out of the account. Roth IRAs distributions however are tax free. Essentially you need to know the tax status of all assets, a $100,000 taxable account is worth less than a $100,000 non-taxable account. The same can be said for debts and expenses, as some receive more favorable tax treatment.
My best advice is that both people involved in a divorce should get guidance from a Certified Financial Planner during the process, making sure they have ALL the pertinent financial data. An hour or two spent with a Certified Financial Planner is time well spent. A qualified planner can help educate a person, and possibly bring a quicker resolution to a divorce. Saving everyone involved time, money and heartache.
What do the business lawyers say?
We asked Ben Himmelstein, a business attorney in Phoenix with Radix Law:
Ben Himmelstein: I have represented many dentists and other medical professionals throughout my career in a variety of contexts – from practice purchases and sales to litigation over various practice issues. I am also (luckily) married to a dentist, so I get to witness practice issues first-hand. Gone are the days where dentists could simply practice dentistry. Now, they are asked to wear so many different hats – not just performing dental procedures – but also running a business. In fact, across the country, there has been an uptick in dentists pursuing advanced business degrees, like an MBA. This seems to stem from increased competition in the industry, as well as the introduction of Dental Services Organizations into the fold.
As though practicing and business operations were not stressful enough, adding divorce into the mix would make anyone feel overwhelmed. Dentists dealing with marital challenges really need to be able to compartmentalize their personal lives in order to ensure that it does not interfere with their professional judgment and clinical practice. Recently, a partner in a dental office was running a very successful practice but became embroiled in a messy divorce. Of course, due to the expansive nature of the divorce, the dentist’s partner was foisted into the middle of the mess. The future ex-spouse served subpoenas during practice hours, requested overly extensive financial disclosure, and sought information irrelevant to the proceedings. This drama created an unhealthy and unproductive environment for both of the doctors and their staff.
The best way to avoid issues like this is to have clear provisions set forth in the practice’s Operating Agreement regarding how to handle divorce by one partner. This could include a valuation formula for the practice, a spousal waiver that the ownership interest is sole and separate property, and provisions regarding restrictions on transferring ownership interests.
Leslie Satterlee is a Family Law attorney at Woodnick Law, PLLC in Phoenix. Her practice focuses on complex asset driven divorce matters including medical and dental practices. Leslie can be reached at Leslie@woodnicklaw.com
Larry Mathis, CFP® has helped countless dentists manage their financial affairs. Larry can be reached at Larry@mathiswealth.com
Ben Himmelstein is a lawyer in Scottsdale who has helped medial practice owners navigate complicated legal decisions and business divorces. Ben can be reached at Himmelstein@radixlaw.com
Marni Steinberg June 29th, 2020
Posted In: Uncategorized
By: Leslie A. Satterlee and Ben Himmelstein
Going through a divorce is difficult in every way, but things can get especially difficult and complicated when you own a business with your spouse. There are three main avenues that people may take regarding the community business: buying out the other spouse, selling the business, and continuing to own the business together.
Before going into those three options, there are some other considerations to keep in mind. When dividing assets and a business in a divorce, it is important to identify whether it is community property or separate property. This classification depends primarily on whether the business was formed prior to the marriage, or whether the funds that were used for the business were acquired during the marriage. If a business is found to be separate property of one spouse, there may still be community interest to divide, but the Court is more limited as to disposition of the business. For purposes of this article, we assume the business is community and owned only by the spouses.
Buying out the other spouse
This first option is the most popular and as the name suggests, one spouse simply buys the other spouse’s interest in the business.
To do this generally, the parties need to obtain a business valuation. Although the spouses may agree on the value of the business, usually there is at least some debate. The valuation of the business’s value can be done in one of three ways: the income approach, the market value approach, and the asset approach. This valuation is typically done through a third party like an accredited senior appraiser, a certified business appraiser, or a certified public accountant accredited in business valuation.
Once a value is determined, then one spouse will buy the other out. An example of this would be: Scott and Karen jointly own an ice creamery and the fair market value is $500,000. Karen would like to continue the ice creamery whereas Scott would like to set up an e-commerce business after the divorce. Karen can buy Scott’s half of the business interest by paying him $250,000, typically drawn from her portion of other community assets (e.g. retirement accounts, savings accounts, or equity in real property). If the parties own a residence with $500,000 in equity, for example, it is simple enough for Karen to waive her interest in the home in exchange for Scott waiving his interest in the business. Karen would become the sole owner of the ice creamery.
Selling the business
The second option is to sell the business and divide the proceeds between the two spouses. This option may come into play when a buyout of the other spouse’s interest is not possible, e.g. because there are insufficient community assets to offset the or the spouse who wants to keep the business cannot qualify for a loan, or the parties cannot agree upon a value or who should continue to own the business post-dissolution.
This last option is normally the least preferred choice out of the three because the ex-spouses would continue to be involved in each other’s lives due to the business. The reasons why spouses may elect to stay co-owners include instances when there is too much debt attached to the business to sell, the parties both desire to get out of the business in a relatively short timeline (including retirement), or both spouses are gainfully employed in the business and, despite their divorce, have a good professional relationship.
For many, imagining continuing to own a business with your ex-spouse is preposterous; however, circumstances sometimes require this kind of creative solution. Particularly, during times of financial crisis or economic downturn (such as during a global pandemic) remaining co-owners – at least temporarily – may be the only feasible option.
How to maintain joint ownership of a community business after divorce
In the courtroom, judges can only award the business to a spouse with appropriate offsets or order the business to be sold and proceeds divided. The court cannot order that the parties maintain joint ownership of the business. In a recent case, Dole, the Court of Appeals of Arizona found that Title 25 (i.e. marital property) limits the court’s jurisdiction to just dividing community property and affirming separate property at the time of dissolution. Essentially, the court cannot order parties going through a dissolution to keep their business after the dissolution. If the court was to order the parties to continue to have joint ownership of the business, it is usually limited to extremely short periods (e.g. While a sale is pending).
Joint ownership can only be done through a settlement agreement which is usually achieved through private mediation. Furthermore, investing in the process of resolving your divorce through negotiation pays off in the long run in order to maintain a healthy business instead of having a judge ordering the business to be sold.
Practical considerations of joint ownership after divorce
What would co-ownership look like? The ex-spouses could either agree to completely own the business together or agree to jointly own the business together for a specified time until other options become viable. They may agree for one spouse to manage daily operations for the business while the other spouse becomes more of a “silent partner,” especially if these are like the roles they occupied during the marriage. The parties could also agree to hire a manager to operate the business and restructure their ownership so that they operate more as shareholders and directors to avoid conflict.
For this option to be effective for both parties, it is essential to restructure the way the community business was owned to take into account the fact that the business owners are not married anymore. Since understanding this is so imperative, we would recommend talking to a civil attorney to help the restructure through a partnership agreement or business operating document between the two co-owners.
Ben Himmelstein, a business attorney in Phoenix with Radix Law, has helped many businesspeople restructure their companies after a divorce, create new operating agreements, and otherwise navigate the challenges of significant life changes while owning a business. He provides some additional advice below:
What is a Limited Liability Company Operating Agreement?
Unlike corporations, limited liability companies (LLCs) are really creatures of agreement. Corporations, on the other hand, are much more strictly governed by each state’s particular statutory scheme. And, while there are fairly thorough statutes governing LLCs, most of the statutory provisions can be modified by way of an LLCs’ operating agreement. Of course, LLCs are the more preferred structure for most small to medium sized businesses for various reasons, including flexibility and taxation.
That is why it is extremely important for LLCs to have thorough and clear operating agreements. The agreement consists of the “rules of the road” between members, if member-managed and managers and members if manager-managed. It should attempt to define the contours of the business relationships and determine what will happen if disagreements arise before they do. So, while an operating agreement cannot possibly address every eventuality, it can certainly address common disputes and provide mechanisms for resolution.
Each operating agreement can be customized for the specific business and may be more complex where there are multiple members or unique circumstances (such as spouses continuing to own a business together after a divorce). No matter how much people love or trust the other members in the business when it was formed, the operating agreement is there for when relationships sour over time, and they often do.
Some key points an operating agreement should address: (i) who controls the day-to-day decision making; (ii) whether distributions of profit (including distributions for members to pay taxes) are required and when; (iii) what records members are entitled to see; (iv) how members can exit the business if necessary and for how much; (v) whether one party can force another out of the business; and (vi) how the members will handle conflicts between themselves. These types of provisions are critical, especially when the members are a married couple because the most predictable thing that can happen in that case is divorce.
Conflict of Interest
According to the Arizona Rules of Professional Conduct, one attorney can represent the “to-be-formed” LLC when creating the operating agreement so long as the members’ interests are generally aligned. But, the attorney must get a conflict waiver and cannot “prefer” one member’s interests over the other. So, the attorney merely writes the agreement up and brings up issues the parties need to resolve, as opposed to advising the members one way or the other.
If the members in an LLC are getting divorced, it is not advisable to use one attorney to draft an operating agreement. Each member should utilize separate counsel because their interests are completely divergent from each other. For example, one member-spouse may want to keep the business going and, the other may want to sell it. Or, one member-spouse may want to reinvest profit every year and the other may want to receive steady profit distributions.
Realistically, how successful is this?
Many divorcing couples continue to own businesses together. Obviously, the success depends on how acrimonious the couple is towards one another. Predictably, the more clearly defined the “rules of the road” are, the higher the likelihood of success of jointly owning a business post-divorce. But, often it is simply best for one member to buy the other out unless the divorcing couple can set aside their personal differences and unite towards a common goal.
Leslie A. Satterlee is a partner with Woodnick Law and has been practicing family law exclusively since graduating cum laude from ASU’s Sandra Day O’Connor College of Law.
Ben Himmelstein is a partner at Radix Law. He is a business lawyer whose practice focuses on business disputes and transactions. His practice includes business break-ups, misappropriation of trade secrets, business torts, sales contracts, buy and sell agreements, and non-compete and non-solicit agreements.
Marni Steinberg June 9th, 2020
Posted In: Uncategorized
PHOENIX – Radix Law partners Jonathan Frutkin and Ben Himmelstein have both been selected to Arizona Business magazine’s prestigious list of Top Lawyers. The list will be published in the March/April issue of the magazine.
Frutkin acts as General Counsel to a number of Radix’s business clients. He has been recognized for his work in mergers and acquisitions as well as securities law. Himmelstein is known for his work on commercial litigation and business law matters.
“We are thrilled to have two attorneys on the list this year,” said Frutkin about Radix Law. The boutique law firm focused on business matters has a dozen lawyers and is located in Scottsdale.
When Himmelstein heard about the recognition he said, “As I scan the list, I’m honored to be included with so many excellent colleagues (and sometimes opposing counsel!) that I’ve had the privilege of working with for so many years.”
Marni Steinberg March 11th, 2020
Posted In: Uncategorized
Start with the proposition that anybody can be sued at any time for anything. One U.S. Senator even sued God in 2008. Obese children sued McDonald’s for making them overweight. It is easy to file a lawsuit; a person simply submits their complaint and the filing fee to the Clerk of the Court. The Clerk takes the money and files the lawsuit. The Clerk does not read or even care what the lawsuit says. That is for the Court to decide.
Getting sued can be scary, annoying, irritating, and frustrating, but understanding what to do when it happens can help you feel more prepared. Sometimes just comprehending the process will ensure success further down the road.
More often than not, your business will have a pretty strong idea that someone is planning to sue before they actually do. Many times, you may receive a demand letter complaining about something and commanding your business take some corrective action or pay money. The demand letter may or may not come from an attorney. At this pre-litigation stage, your business may benefit from early intervention and settlement conversations. Depending on the circumstance, it may make sense for your business to try to engage the complaining party and determine if the issues can be resolved before litigation ensues.
Take Active Steps to Preserve Evidence
Once your business becomes aware of the potential for a lawsuit, it is under a duty to preserve and protect records and evidence that relate to the dispute. This includes emails and text messages. Your business could suffer serious penalties if a Court later discovers that you intentionally destroyed documents pertinent to the dispute.
After Service of Lawsuit
If your business cannot resolve the matter by way of settlement, and the complaining party actually sues your business, your registered or statutory agent will receive the formal complaint. The Complaint will usually be personally delivered by a process server. The registered or statutory agent (if it is not you) should then send a copy of the Complaint to you.
It is imperative to review the formal Complaint thoroughly to understand what the allegations are. This way, you can have an educated conversation with your business’ legal representative about what is going on. Do not ignore the lawsuit even if you think it is false and your business did nothing wrong. There are strict timelines and deadlines for your business to respond. If you miss these deadlines, the plaintiff may be able to obtain a default judgment against your business. These are very difficult to set aside.
Contact Your Insurance Agent Immediately
Contact your insurance agent or the carrier as soon as you receive the lawsuit. When businesses fail to notify their carriers promptly about litigation, sometimes the insurance carrier may deny coverage.
It is possible that the business will have insurance coverage for the claims the plaintiff is making. This, of course, depends on your policies, coverages, and riders. Make sure the business’ insurance agent explores all current, as well as old policies. Some policies are claims based and some are occurrence based, so even if you terminated a policy, it may still cover you. Also, check with any trade associations in which your business is a member because the association may provide coverage. If the insurance carrier does provide coverage (even under a “reservation of rights”), it may assign a lawyer to defend the lawsuit. After your business pays the policy deductible, the insurance carrier may cover the business’ legal fees, investigation costs, any settlement during litigation, or even a final judgment against the business.
Contact the Business’ Attorney
As indicated above, there are some strict timeline to respond to a lawsuit. The business’ lawyer will need to act fairly quickly to ensure that the business answers or files a motion to dismiss within the timelines provided by the Rules of Civil Procedure. Also, the quicker the lawyer understands what is going on, the more time he or she will have to develop the business’ defenses, gather information, interview witnesses, and determine the appropriate legal strategy.
Make sure to tell your lawyer the full story, even if it is embarrassing. The business is protected by the attorney-client privilege, but there is nothing worse than a lawyer learning of bad facts and not having time or the ability to defend against them.
If you do not have a business lawyer, contact any other type of lawyer and they should be able to refer the appropriate person. You could also contact another business owner and they should also be able to refer you to someone. Do your research and make sure you look up the lawyer’s credentials to make sure your business is getting the best legal representation possible.
Keep the Lawsuit on a Need-to-Know Basis
Usually, it is a bad idea to talk about a lawsuit with friends, business associates and reporters unless your lawyer says it is okay to do so. In litigation, the other side seeks out opportunities to use what you say against you. Do not give them the opportunity. It is fine to discuss lawsuits with your clergy, doctor or psychotherapist because they have an obligation to keep what you tell them secret.
Stay Calm and Let Your Attorney Work
Unfortunately, lawsuits have become very common for businesses. While legal issues can cause severe anxiety and frustration, generally, they do not resolve quickly unless there is a settlement. Be prepared to litigate for the long haul – you may not see a Judge for more than a year. Your business hired its attorney for a reason. Trust in their knowledge and the process.
So long as you take the actions above, it will help ease the stress of litigation and will assist your business in obtaining the best possible result.
Marni Steinberg July 17th, 2017
Posted In: Uncategorized
“Many people think they need a ‘bulldog.’ The phrase is interesting because bulldogs are slow and not very aggressive. The more appropriate thing to look for is somebody who is a tactician. Strategy in litigation is everything. You need someone who loves to play chess or, as I call it, ‘psychological warfare.’”
Marni Steinberg May 17th, 2017
Posted In: Uncategorized
PHOENIX – The Frutkin Law Firm has become the first Arizona practice to take advantage of the state bar’s trade name rule. It announced it will rebrand as Radix Law on Jan. 1 2017.
There is a long tradition in the practice of law: the name of a firm includes the surnames of the most prominent partners. As law has become such a big business over the past decade, the largest practices in the world are names of partners who have long since passed away.
This tradition was also required by the Arizona Bar until recently. Now, firms can ditch the commas in favor of a more universal trade name.
Radix, in Latin, means “root.” It can mean the root of a tree, the root of knowledge or the root of a number. While the firm’s attorneys come from all over the world, they have decided to be rooted in Arizona.
“Our new name reflects our values,” says Principal Jonathan Frutkin. “We are a business law firm that helps our clients pursue opportunities and fights for them when challenged – and we are rooted right here in Arizona. It is also an acknowledgement that we have grown from being a solo legal practice into a business law firm with almost a dozen lawyers.”
The Frutkin Law Firm was formed in 2007 and now has 11 attorneys with decades of experience. They serve companies, individuals and families throughout Arizona in business and corporate law and related areas, ranging from taxation and asset protection to bankruptcy and estate planning. Radix Law leads the Valley of the Sun in estate planning and trust administration law. Radix Law’s attorneys are respected sources in their field and contribute to local and national media.
Radix Law, formerly The Frutkin Law Firm, was founded in 2007 by attorney Jonathan Frutkin with the goal of providing exceptional legal representation to clients throughout Arizona in business and corporate law and related areas. Radix helps businesses, individuals, and families in Phoenix and throughout Arizona with their corporate and business law, bankruptcy, taxation, asset protection, wills, trusts, and estates, and litigation needs. The firm is located at the Kierland Commons in Scottsdale. For more information, visit radixlaw.com
rxadmin December 30th, 2016
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PHOENIX – Ben Himmelstein, partner at The Frutkin Law Firm, has been selected as a member of Nation’s Top One Percent by the National Association of Distinguished Counsel (NADC).
The NADC is an organization dedicated to promoting the highest standards of legal excellence by recognizing attorneys who elevate the standards of the legal practice.
Himmelstein, who was named partner earlier this year, represents a number of medium-sized businesses in Arizona. As the former Chairman of the Board of the Arizona Small Business Association, he is passionate about helping Arizona’s business community thrive. He primarily helps clients in business litigation (contract disputes and intentional torts), business transactions (formation and contract negotiation for limited liability companies and corporations).
“I’m humbled to be among the attorneys selected by the NADC,” says Himmelstein. “It’s an honor to join this nationwide network with other distinguished members of the practice.”
Himmelstein has received numerous awards and recognitions over the course of his career, including AV Preeminent rating from Martindale-Hubbell. He has been named one of the Southwest’s Rising Stars by Super Lawyers for the last five years in a row, is listed as one of Arizona’s Finest Lawyers and is a Lead Counsel Rated Attorney.
“The NADC has recognized Ben is a well-respected attorney in the industry – not just in Arizona,” says Jon Frutkin, principal of The Frutkin Law Firm. “We’re all proud of his latest achievement.”
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