Credentials, credentials, credentials; when it comes to practice valuations you need an expert well-versed in dental practices.
Dental practice valuations play such an important role in the life of a dentist. The purpose of the valuation may be for a transition, a divorce, partnership dispute, an estate appraisal or many other areas of interest to the dentist and his or her spouse or heirs.
Knowing how important this report is for the wellbeing of those who are involved with finding the best credentialed evaluator is a major task that should not be taken carelessly. There should be interviews held with at least 2 or 3 evaluators and their credentials should definitely be reviewed.
Questions you’ll want to ask would include: How many dental practice valuations have they prepared? Have they testified in the court room? Are they familiar with the rules governing equitable distribution in a divorce proceeding? These are some of the questions that have to be asked of those being considered to be retained to undertake the mission of the preparation of the valuation. Whomever is chosen should also be ready to support his or her opinion in the courtroom.
Let’s look at the authorship that you would want to have on your dental practice valuation under a number of circumstances:
Probably the most important thing to resolve is whether the evaluator is an expert in dental practice valuations or a general business appraiser? Hopefully the general business appraiser is not chosen since he or she is not familiar with goodwill in a dental practice and the extraordinarily high percentage of gross revenue that goodwill represents in a dental practice compared to that of a general business.
If we start with the purpose of the valuation being for a divorce proceeding, what would the interview consist of for the potential evaluator to be retained: One question for sure would be how many divorce valuations and testimony has the possible hire been involved with during his or her career? Does he or she understand the importance of states with equitable distribution rules compared to those who are community property states? If many divorce valuations for dental practices have been prepared (more than 100) how many times has the evaluator gone to court to testify on behalf of his or her client and to defend the valuation? If the number of dental practice valuations prepared is less than 100, interviews should be conducted with other more qualified dental practice evaluators.
Shall we interview a dental practice evaluator who has been less than interested in going to court for defense
From a practical and monetary perspective this does not make sense. If another evaluator is needed to go to court, that person will have to review the original valuation and may eventually challenge the content of the report. You certainly don’t want an adversary to represent you. An evaluator who has the credentials of the number of evaluations prepared, court room experience, and the expertise to challenge the opposition’s valuation and evaluator is the one that should be retained. Starting over with a new evaluator after completing the valuation is expensive and frustrating.
What about partnership disputes and goodwill allocations?
Here is one of the most frequently argued issues involving dental practice valuations and which dentist, if a partnership, is the one who is the “rain maker,” and who the patients are really coming to see? Production is certainly a key attribute in determining goodwill and it can be measured effectively with computers almost every day. From the production comes the collection and the costs to be subtracted from the collection to determine what the actual bottom line number is for the dentist and his or her dental practice. This amount can easily be compared to the net collected production of the other dentist(s) in the dental practice to determine who is responsible for the gross revenue of the practice. When patients call, who is the dentist who gets the referrals for new cases from those answering the phones? What is the name of the practice and who has trained the personnel? There are many other attributes used to determine who is the lead dentist.
What happens when a transition is about to occur?
Of course, a transition does not just occur. It takes a long time to plan, good advice over the years from a solid dental CPA and other financial advisor and enough time to make changes to the overall office plan so that the timing is a help and not a hindrance. The most current production at its peak is the aim of advisors to the dentist as the time to sell gets closer.
The older years are important but there is little that can be done about the past years. The current years count the most for the valuation and that is something that can be addressed as the practice gets into its best rhythm. The experienced dental practice evaluator uses a weighted average approach for determining the most realistic cash flow. From a common sense approach, a buyer wants to know what he or she is buying and what that information tells him or her now and not 5 years ago or 4 years ago. This gives the dental practitioner time to get his or her act together and to make the dental practice look as good as it can be.
What is the suggested time frame for preparation for the sale?
Realistically no matter what the dental practice broker may tell you about the timeline for the transition, the planning to get things in presentable condition takes a few months. If the dentist has been diligent and has kept up with things as he or she progressed with the practice development, a lot of the hard work may have already been completed. If the dentist has been preparing for the transition for years, there may be very little left to do before the brokerage agreement is signed.
All of the above scenarios do not preclude other situations when a dental practice evaluator needs to be retained for the practice. Most importantly, make sure that a dental practice evaluator is retained and not a general business broker who does not really understand dental practice language and value points from the practice.