For most dentists, their practice represents the largest single asset they own outside of their personal residence. It never ceases to amaze me however the lengths some docs will travel to avoid paying for a legitimate valuation of their practice. Any shortcut or bargain basement special that comes along is often chosen, often to the eventual disappointment with the results. To that end, let’s discuss some valuable questions that might have been asked, followed by some key elements of a legitimate appraisal.
- This is the first (and maybe the last) question you should ask. Are you willing to go to court and testify to the validity of your report? Walk away if you get anything other than an unqualified YES.
- How many of these have you done? While everyone has to start somewhere, experience is a major factor in expert witness testimony as those proceedings lack the benefit of a buyer and seller negotiating a fair market price. If there is a possibility that the outcome of your case could rest on the conclusions of an appraisal, the best help in town will be cheap in the long run.
- What are your professional affiliations and what guidelines do you follow? While veterinary, optometric and chiropractic practices are similarly valued, dental practices have a unique set of circumstances that require the expertise of someone who is part of the dental practice valuation industry. In addition, adherence to a proven valuation model will produce consistent and defensible results.
- Have you published anything? While the “Publish or Perish” mentality of the Ivory Tower might be taking it to an extreme, the fact is that recognized experts are invited to submit content for text books and professional journals. While blogs can be little more of a free for all, textbook editing and the accompanying peer review can give you some comfort that the industry has vetted its authors.
- What valuation methods will be included in your report? We will discuss shortly some of the standardized methods but be wary of any “in-house” techniques that in the end are nothing more than putting your thumb on the scale and pushing down until you get the number you want.
- Have you ever valued, marketed, sold, secured financing for and closed on the sale of someone else’s dental practice? While a YES answer may still not be a satisfactory indicator, a NO answer almost certainly means that the valuator has no personal transitional sales data. By analogy, what real estate appraiser would issue a report on the value of a three bedroom suburban home without knowledge of what comparable three bedroom houses in similar neighborhoods sold for? While real estate transactions are recorded public knowledge that can be researched, dental practice Comparables come from the valuator’s personal experience. No local market sales means no local market data.
- Now that you have asked these questions, gone through the practice and financial analysis process and received the report, here are a few key things to review and understand.
- Was there a complete inventory of the office furnishings, equipment, supplies and instruments done by the valuator? While the values placed on used dental equipment can be somewhat arbitrary, there are industry guidelines as to the ratio of tangible vs. intangible asset value in order to secure financing for a sale. While the tax consequences of this allocation is a head-butt between the buyer and seller, market experience can provide a fair and reasonable number for these categories.
- NEVER trust a report that relies on some standardized multiple or “Rule of Thumb” as there is none. That rationale relies on at least two bogus assumptions. First is that the rule is applied to practices of all shapes and sizes when in fact practices with different revenue levels have historically sold for different percentages of gross collections. Secondly, it assumes that two practices with identical revenues, one being a rural Medicaid based practice and the other a high tech suburban office will sell for the same price. I can assure you that is not the case.
- Do not trust any method that focuses on the office Production. Since that number is one made up by the seller primarily for the purpose of being above any possible insurance benefit threshold, it is unreliable and in some cases, just wishful thinking. If you have had a hospital procedure done recently you have no doubt been amused by the difference between the amount billed for your procedure versus what was ultimately accepted and paid. Collections (aka revenues, deposits, receipts) are the only standard of measurement.
- I would be very distrustful of any report that focuses on a Proforma and/or a method such as the “Present Value of Discounted Future Cash Flow” (and its variants). While these kinds of projections can make a banker feel good about their loan, they make the assumption that practice revenues will climb at a consistent and steady pace over a long period of time. Just like in real estate (“Real Estate always goes up in value, except when it doesn’t”), purchasing a practice based solely on projected revenues can be risky. Just ask someone who relied on that information in 2007 to buy a practice. My guess is that they were disappointed in those projections.
- There is no single method of valuation that is acceptable with all practices. The Goodwill Registry, Summation of Assets, Capitalization of Earnings, Comparable Transactional Data and ultimately a cash flow Sanity Check should be included in the mix.
- Lastly, I would be skeptical of any report for which the appraiser did not make a personal appearance in the office.
A fair and accurate valuation can be the cornerstone of a retirement plan, transition strategy or unfortunately a property settlement. Hundreds of thousands of dollars can be at risk. The answer to Johnny Carson’s old game show question “Who Do You Trust?” should come down to educating yourself about the process, interviewing candidates for the assignment, being sure that you’re getting what you think you’re getting and not being afraid to pay for it.
Steve Wolff, DDS
UMKC Class of 1977