Standards of value for dental practices

August 21, 2019

Here's what your evaluator must know.

 When a dental practice valuation expert is retained for the purpose of evaluating the dental practice for a transition, it is a safe assumption that the standard of value to be used would be fair market value. This is because of revenue ruling 59-60, whereby the sale is presumed to be to a hypothetical buyer and seller.

The valuation expert uses the information received from the seller to prepare the valuation and then formats the language so that the data included in his or her report is being prepared using the standard of value based on fair market value. A quick definition of this standard is the highest price with the best terms negotiated, where there is no duress on either party to the transaction, each is informed about how the dental practice operates and what to expect is assumed. This is the guideline for determining the fair market value of the dental practice that the report from the valuation expert is based upon.

What occurs if the purpose of the valuation is not for a sale of the dental practice but for some other reason? An expert report prepared for some type of dissent, may have a different standard that could have been set by the courts in the particular state where the valuation is being undertaken. This may alter the worth of the dental practice and the expert must know the standard to be used.

Examples of dissent that change the fair market value standard of a dental practice include minority shareholder protests of value, divorce, depending upon the state, partnership disputes, damage claims and other opposition to the use of the fair market value approach because of the circumstances. 

Related reading: Get the lead out when going through a dental divorce

What types of standards may be used in the preparation of a dental practice valuation? 

Any evaluator of a dental practice would almost automatically assume the fair market value approach is to be used in the event the purpose of the valuation is for a transition to another dentist or to a DSO. When there is another purpose for the preparation of the valuation, the valuation expert must be aware of the purpose, the state in which the valuation is being used and whether or not a dissent is part of the background for the preparation of the valuation. Dissenting shareholders typically are charged with different types of discounts to represent the value of their shares using a fair value standard. There are minority discounts and lack of marketability discounts that are typically used in the preparation of the valuation for the purpose of the value of a shareholder with fewer rights than those of the majority shareholder. When a fair value standard is used , the major, though not the only, difference is the fair value approach does not take discounting the value of the dental practice into effect compared to a fair market value that does There are also adjustments for goodwill allocated to the personal asset of the dentist and goodwill representing the marital or enterprise asset value.                          

Who prepares the dental practice valuation expert?

At depositions, mediation conferences or at trial, opposition attorneys try to impugn the credibility of the evaluator by asking the extent of knowledge of the law in the state in which they are testifying. It is really up to the attorneys in the case to know the law of the state and the evaluator must know the professional guidelines for his or her designation, the standard of value to be applied to the specific issue and the premise of value, such as that of an ongoing concern, as a hypothetical example. Prior to the commencement of the valuation report, the attorney and evaluator must agree upon which standard of value is to be used for the specific purpose of the valuation. The attorneys normally prepare the evaluator for the presentation of his or her report in advance of the testimony.  In most cases, attorneys have not had much experience in working with dentists. It is up to the evaluator to assist the attorney with understanding the valuation prior to any proceeding occurring just as it is up to the attorney to prepare the evaluator with any particular law in the state that may change the standard of value to be applied by the evaluator in the preparation of the valuation. 

In conclusion  

When being retained for the purpose of evaluating a dental practice, it is incumbent on the client, the attorney and the evaluator to work together so that the purpose of the valuation is known well in advance of its preparation commencement. The laws of the state in which the valuation is being prepared, the standard of value to be used and the overall approach should be known to the dentist prior to any services being performed.