08 Dec Appraising a Dental Practice
It seems there are as many methods of appraising a dental practice as there are dental practices to appraise. Believe me, we have heard them all and have seen most of them over the years. Every self-proclaimed expert has developed a “magic formula” or a “rule of thumb” appraisal method. You can read about them in dental trade journals virtually every month.
To assign an accurate value to a dental practice, for the purpose of selling the practice, it is simply not possible to use a “magic formula” or a standard “rule of thumb” valuation method. An accurate dental practice appraisal requires that much more is considered than just a practice’s gross income, net earnings, or its equipment and supply inventory.
Gross Income Method: If a formula was based only on the gross income of a practice, would it not be true that a high-quality, fee-for-service practice would have the exact same value as a low-fee, high-volume managed care practice of the same gross income size? Would you pay the same price for each of these practices? I would hope that you would not!
Net Earnings Method: If our high-quality, fee-for-service practice employs an aggressive accountant who shows little or no net taxable income for income tax purposes and the low-fee, managed care practice shows a very high net income, does this mean that the high-quality practice is worth less than the low-fee practice? We don’t think so!
Equipment, Furniture, and Supplies: These assets are very expensive items to purchase, but have very little value for resale. If you think an automobile depreciates quickly, try to sell your used dental equipment (no matter what the age of the equipment may be). Equipment, furniture, and supplies have very little impact in determining the true fair market value of a dental practice (unless, of course, you are talking with the dental supply salesman who sold you the equipment). Honestly, these assets provide only 10% to 15% of the total appraised value of a dental practice.
The items mentioned above are definitely contributors to determining the true fair market value of a dental practice, but contrary to what some valuation “experts” proclaim, none of the above is the sole determining factor. Other factors to be considered which amount to at least 85% to 90% of a practice’s fair market value are:
- Neighborhood Profile
- Office Exposure
- Age of Selling Doctor
- Overhead Percentage
- Geographic Desirability
- Type of Practice
- Seller’s Personality
- Down Payment Requirement
- Area Growth Trends
- Number of Patients
- Practice Fee Schedule
- Payment Terms
- Area Competition
- Type of Transaction
- Lab Fee Percentage
- Price Allocations
One of the most common and potentially the most costly misconceptions a seller may have when it comes to appraising a practice is the need to have an appraiser come to the office for an on-site appraisal. It should be understood that the market value of a professional practice is never demonstrated by the equipment or furniture on the premises, but by the income that the practice can generate for a potential purchaser. This can be determined from tax returns, current financial statements and an analysis of the practice’s internal growth potential.
We know of numerous sellers that paid huge sums of money to have an appraiser come to their office to look at their equipment and furniture. As we already mentioned, equipment, furniture and supplies amount to less than 15% of the appraised value of a dental practice. A list of equipment accompanied by photographs is more than adequate for purposes of an appraisal. This alone saves a seller hundreds and even thousands of dollars in appraisal fees.
On-site appraisals emphasize the tangible over the intangible value of a practice to a potential purchaser. This is a very costly mistake. This usually causes that purchaser candidate to spend an inordinate amount of time and thought to the least important factor when evaluating the purchase of the practice. The purchaser’s advisors are also spending a lot of time and money concentrating on things that really have no bearing on the validity of a practice opportunity. When focus is placed in the wrong direction, it is very common for a practice not to be sold. And, all because a purchaser has decided that he or she did not like the equipment, or the office décor was wrong for their kind of patients.
Instead of concentrating on the income potential and the economic opportunity that purchasing a practice could represent, the purchaser is sidetracked by an appraisal that placed near total emphasis on the tangible assets. A competent appraiser minimizes the equipment and furniture assets and emphasizes the intrinsic or operating value of a professional healthcare practice.
A practice valuation represents the judgment and knowledge of the current market by the appraiser. To give a comprehensive appraisal of a practice, one must be aware of the legal and tax ramifications. This requires specific knowledge and extensive experience in the dental industry. Formulas are a poor substitute for sound judgment and experience. Knowing the factors, and their effects on buyers, leads to an accurate and effective valuation.
The bottom line is that an appraisal without the realistic probability of a ready, willing and able buyer is worth absolutely nothing. Professional appraisers who know nothing of finding buyers and/or have never actually sold a dental practice are simply a waste of your money. If you are trying to sell your practice, what good does a valuation do you if you can’t find a buyer willing to pay the established price?
PARAGON consultants sell practices, and literally thousands of them. Since 1988, we have sold virtually every practice we have listed. And, virtually 100% of these practices were sold without negotiating away a single cent of the seller’s originally established fair market value. We provide our practice valuation clients with the exact same highly successful valuation report that we provide our seller clients. This report is complete with a comprehensive financial analysis that includes a practice income and expense proforma (projection) that clearly demonstrates to a purchaser-candidate the income potential of the practice. The report de-emphasizes the less valuable equipment and furniture and places the emphasis where it belongs, on the intrinsic or operating value of your dental practice.
Our comprehensive and professional practice evaluation process has enabled PARAGON to become one of the most successful dental practice transition firms in the country. Our financial analysis and practice valuation report is by far the best and most comprehensive available.
Call PARAGON today and arrange for a realistic valuation for your practice.