The dangers of evaluating a dental practice

March 13, 2018

When it comes time to evaluate your practice, will you ask the right questions?

If you are looking to transition your practice and searching for the most qualified dental practice evaluator, one of the first questions to ask is “what formulas do you use in preparing the valuation?” This will instantly give the knowledgeable practitioner insight into how the value of the practice will be determined.

It will assist in knowing whether time and money are being wasted on the evaluator who is merely trying to “sell” his or her concept to the dentist - without regarding facts that accurately describe the practice’s actual worth on the open market.

Will suitors look at the appraisal and see proofs that they can rely upon when attempting to obtain the financing necessary to acquire the practice? Is the evaluator just giving a sales pitch to make things look better than they are so that the dentist will list his or her practice for sale with the evaluator’s firm?

If the gross revenue of the practice is the high point of the valuation formula, the spouse should beware of this type of evaluator and formula. The gross revenue trend, whether up or down over a five-year period is a good indicator of a starting point, but not the formula for the value.

Besides the gross revenue trend, the earnings of the practice are critical for a buyer. These earnings when capitalized are a successful valuation method. The potential buyer needs to ask, “what is left to pay the buyer’s lender after all of the bills are paid?”

The uninformed may not retain an expert for the impending decision because of the costs

Some who are uninformed about the generalities of dental practice valuations - a prime example would be widows or widowers of dentists. They must review information about dental practice evaluators to make a decision about whom they should retain to assist them in marketing an accurate value for the sale of the practice without the primary dentist.

In a typical situation, they are extremely worried about the worth of the dental practice and who they can rely upon. Many times, the spouse of the deceased dentist does not have any knowledge of the professionals that the dentist dealt with while the practice was being built. They are trying to find someone they can depend upon to help. It is easy for them to be fooled by the evaluator who promises to prepare the valuation for free with the caveat that the practice listing agreement will follow. Remember the old adage: You get what you pay for.

To whom does a seller go who is uninformed as to dental practice values?

If the deceased dentist’s spouse goes to the dental CPA, that is an excellent first step. Even without any direct contact prior to the dentist’s death, the dental CPA is still a reliable and trustworthy resource with whom to begin the process. An interview is important to get some general ideas about what the spouse should be concerned about when having conferences with potential evaluators. In many cases, the dental CPA will help the spouse find the appropriate evaluator and dental practice broker with whom the practice will be listed.

Listening and relying upon the professional experts is so important to the uninformed owner of the dental practice who becomes so by chance. For the spouse to be involved and to make a decision on his or her own without support from an expert will almost always result in an incorrect value and listing price.

Timing the transition

A transition can take up to six months with proper guidance. The marketing of the practice, arrangement of financing for the buyer and the maintenance of the infrastructure of the practice are very liquid as the practice continues to operate as usual. For the uninformed, especially when a death has occurred, the quicker the sale, the better the price and payment terms will be for the surviving spouse. For those with time, and the dentist still working and being involved with production, the timeline is much more flexible. A widow or widower will find that the quicker the transition occurs, the more likely the sale price will be on the high side. After a dentist is deceased, the dental practice value begins to drop precipitously. The major problem is the lack of production and net income, since the major producer is no longer there. Whatever the reason, an accurate dental practice valuation with proper formulas and a realistic value will help insure a good sale price in a timely manner.