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Don’t settle for a gimmick - valuation is important and should be done by someone who knows what they’re doing.
The expert evaluator of dental practices sometimes takes things for granted when completing and explaining the valuation and its process to the dentist.
One reason may be that the dentist has been in practice for many years and there is an assumption by the evaluator that he or she understands things much better than he or she actually does. The important nuances of the valuation report are sometimes missed or not as important to the dental client.
Whether preparing the report for a transition through a practice broker, associate acquisition or for estate planning (among other things), developing the methodologies employed in the valuation process is all about responding to an evaluator’s questions. Since many dentists hear from dental practice brokers about how they can prepare a valuation free of charge, they often wonder why the expert evaluator charges what he or she does. Let’s examine some of the differences in the various purposes for the production of a dental practice valuation.
Selling through a practice broker
Beware of the practice broker who prepares a free valuation as part of the “gimmick,” used to get the listing agreement. These valuations are typically brief in nature, do not use a certified valuation analyst for their preparation and report a value that is easily attacked in court if the acquirer has buyer’s remorse. The support for the methodologies that were tested to prepare an accurate valuation are not available with the free one. Proper reporting in an appraisal of a dental practice has input that prepares it for a hypothetical buyer and seller who are informed about dental practices and the input that they will be reviewing in the valuation.
The key to making sure that valuation is understood is to have a conference afterward with the seller of the practice to make sure that he or she finds it explainable to any potential buyer. More importantly, the seller should have complete knowledge of the appraisal report so that he or she fully understands it before needing to explain anything to the potential buyer.
This type of valuation is typically about 30 plus pages and presents the profile of the practice that is under review including employee information. It also contains information about the demographics of the patients - namely, where they travel from to visit the practice for their dental needs. There are also other included items that a certified valuation analyst who has familiarity in the preparation of dental practice valuations will know how to explain. The dentist, whether experienced or not, should listen to the explanation to learn what may not be known about his or her own practice.
A sale to an existing associate
This could be the simplest transition to complete. The associate should know more about the practice than anyone found through a practice broker. Assuming that the associate has been employed for a number of years, he or she will have patient familiarity, some knowledge of cash flow from seeing deposits and disbursements and, of course, the skills developed from being an associate and having the selling dentist’s mentorship and tutorial direction.
Up next: What about estate planning?
Understanding the points in the valuation, such as the demographics from which the patients come may already be known from treatment to these patients and discussions with them. The associate will have seen the cash receipts and disbursements and understand that there is rent to pay, telephone bills, supplies and lab fees. The normalization of profit may be an eye opener to both the selling dentist and to the associate when they see the variable items of expense that may be added back to obtain the normalized profit. The normalization process should let the buyer and seller understand more of what net income the practice is really producing and effectively bring that value to the practice.
Estate Planning and other things
A certified valuation analyst who understands dental practices can give an explanation about the practice valuation to the dentist who wants to know what the practice is worth in order to plan for the future.
Estate planning, especially if the dentist has been involved with more than one marriage and may have children from each, is an important potential conflict addresser. Understanding why a practice is worth what it is resolves many issues in the event of death and when the estate is attempting to sell the practice without fully understanding its worth. The most current valuation sets the parameters and allows the attorneys and potential buyers to understand the basis for valuation.