Dental Practice Valuations and How to Make Them as Descriptive as Possible

December 18, 2020
Bruce Bryen, CPA, CVA
Bruce Bryen, CPA, CVA

Bruce Bryen is a certified public accountant with over 45 years of experience and is a part of Baratz & Associates CPAs. He specializes in deferred compensation, such as retirement planning design; income and estate tax planning; determination of the proper organizational business structure; asset protection and structuring loan packages for presentation to financial institutions. He is experienced in providing litigation support services to dentists with Valuation and Expert Witness testimony in matrimonial and partnership dispute cases. He is also a financial writer for several dental journals. You may contact him at 609-502-0691 or at Bryenb@baratzcpa.com, or through www.Bryen-BryenLLP.com.

Why it’s important the next time a valuation is called for to make it as descriptive as possible.

Whether the purpose for valuation preparation is a transition, partnership dispute, divorce, or other, the more descriptive a valuation is, the easier it is to understand. Any advisor assisting with a dental practice acquisition wants a report that he or she and the client will comprehend easily. A judge or mediator involved in a partnership dispute or divorce needs to be able to see both sides of the argument clearly, with supporting evidence. It’s also best to avoid overuse of technical terms while still including detailed information so that the parties who will be reviewing the valuation don’t have to strain to comprehend it. That may seem simple, but it takes an experienced valuation analyst to accomplish it.

There are many standard items that must be included in the valuation to achieve an accurate presentation of the practice. But, aside from the typical data, non-conventional areas can be added to lend clarity and to broaden the understanding of value if one is working with the right professional. One should explore the detail and see if some information can be added that is not normally included in a practice valuation.

A sole proprietorship may be simpler. But, if a partnership exists, each partner has input into the expression of the dental practice value from many sources, as well as, from his or her own experience. Now is the time to explore these areas.

Multi-partner dental practices and the effect of the partner and his or her various abilities upon the dental practice valuation:

When multi-partner dental practices are included within the dental practice valuation, the abilities and contributions of each partner can be included. The valuation would be presented clearly as to the value of the dental practice, but also each partner’s share of that worth. This is not customarily part of a dental practice valuation, but it can be. If or when the practice becomes part of a DSO, typically almost all of the value is attributed to the enterprise and not the personal worth of those individual dentists who contribute to it. There is almost automatically a signature needed when the partner and his or her dental practice joins the DSO, indicating an awareness of the DSO entrance and exit pricing and clinical requirements. Prior to joining a DSO, leaving out the individual partner’s share quickly becomes problematic when a situation arises that results in a dispute which may head for mediation or litigation.

The ramifications of each partner’s contribution and value added to the dental practice valuation/The pros and cons of including as much description as possible:

At that point in the process, the dental practice valuation would be requested to be prepared again, and it should include the individual partner’s share of its value. Besides being needed for the purpose of resolving a dispute without enormous legal and other professional fees, when a transition is ready to occur, it is a good idea to know how much each partner is entitled to receive.

The information needed to complete a dental practice valuation almost always includes the production and collection of information from each provider in the practice. From a practical approach, the ability to segregate each partner’s share of the worth is almost already available.The formula for the completion of the valuation and the methodologies used to do so are already in the report. On an annual basis, the cost and time needed to complete the following year’s valuation is minimal compared to the original effort on the initial report.

If an unfortunate material event occurs, such as the death or disability of one of the partners, it is good to know the value of that partner’s share as well. An important aspect of an operating agreement should include a formula for this calculation for each partner. That information would assist in assuring that exposure to litigation be minimized since the formula should be included in the valuation as well as the methodology for its calculation. Also, there may be additional partners admitted after the initial report. Those partners and their advisors certainly would have studied the original valuation and the purchase price of the new partner’s share would be reflective of the formula’s approach in the valuation. The partners who received the proceeds of the incoming partner’s payment should be reflective as to the value of each of the existing partner’s share, unless all of the funds remained in the partnership.

Defensive management and the deferral or the lack of need for litigation is much cheaper than not being prepared:

Taking the extra steps to prepare a dental practice valuation with as much description as possible may be a little more expensive now, but the costs and headaches that won’t be incurred later make it well worth the extra time and expense. Those who have not been in litigation have no idea about the time and money involved in this type of duress. Attorneys, professional experts and support staff usually demand high fees and require an extraordinary amount of time. Time taken away from your practice. The next time a valuation is called for, make it as descriptive as possible.

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