Tuesday, December 29th, 2020 | by Jed Esposito, MBA, CVA
The Cost of Dental Practice Valuation
A dental practice valuation is much like a preventative checkup on your practice’s financial health. A certified broker/valuator will take an in-depth look at the health of your business and diagnose any areas that may need adjustments or improvements. Periodically paying for a quality valuation on your business will put you in the best position to get your practice in top shape when you are ready to sell it. The cost of a practice valuation will vary widely based on the complexity of the practice(s) involved. Some factors that affect the valuation cost include:
Are there multiple locations?
Are there several owners?
What kind of corporation is it registered under?
Is it merely a baseline valuation or is it an extremely important need like an urgent health issue, an untimely death, marital or a partnership dissolution?
While these are some of the more common factors, there are a multitude of other questions and scenarios that can affect cost of valuations.
So, why pay for a valuation of your dental practice when you have offers to get one for free? It is key to understand that a free valuation can often cost you more in the long run than if you pay for a quality valuation. Free valuations are typically done with quick rule of thumb, or straight percentage methods of collections, or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) that can be misleading and just wrong. The problem is, the lack of specificity regarding all expenses, including everything from salaries to occupancy costs, can vary greatly from seemingly two similar practices. It is important a qualified professional thoroughly analyzes all the financials and facts of your dental practice, utilizing appropriate valuation methods and adjustments. Of course, there are other reasons besides selling a practice for obtaining valuations, which include litigation, partnerships, mergers, estate planning, etc. These too require a comprehensive valuation from a qualified professional.
The majority of valuations are done for doctors either selling a portion or all of their practice. In this case, we advise getting valuations periodically in advance of your desired sell date – two to three years prior is reasonable. A qualified professional valuator that has done thousands of practice valuations can highlight any line items that could decrease the value of your practice or make it difficult for a buyer to get financing. The valuation will reveal the strengths and weaknesses of the practice, which will be identified by the practice valuator. The valuator knows the industry standards for dental practices and can inform the practice owner on how their practice compares to other practices in the area. This will allow the practice owner to have enough time to identify and improve on the weaknesses of a practice so that the changes have a positive effect. Again, it is best to conduct the practice valuation two to three years prior to the time the practice is out on the market to sell.
A dental practice valuation is a professional opinion of the practice’s market value based on all the relevant information. Most financial institutions will want the same information that the broker/valuator has used to arrive at a value in order to secure financing. The following are the major items that are analyzed when preparing a practice valuation:
Type and condition of equipment
Occupancy costs (high or low)
Type of insurance and/or payment accepted (e.g., PPO, HMO and Medicaid, etc.)
Total number of active patients
Number of new patients per month
Specialties and procedures done in-house and/or outsourced
Patient and area demographics
The practice’s goodwill
At ADS Precise Transitions, we perform valuation engagements and present our summary report in conformity with the National Association of Certified Valuators and Analysts (NACVA). The valuation analyst expresses the results of the valuation engagement as a conclusion of value, which may be either a single amount or a range.
The standards of value are investment value and fair market value. The investment value is fair market value without consideration of discounts. This is defined in Revenue Ruling 59-60 as “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”
Most valuations are the “going concern value” type of practice value. These include the dental equipment, office equipment, furnishings, instruments, supplies, patient records, goodwill, URL, and telephone number(s) assigned to the practice.
It’s important to note analyses include, but are not limited to, the above-mentioned factors. To demonstrate a cash flow profit available to a subject practice, Federal Income Tax Returns and/or Income Statements are analyzed. Adjusted income statements are then developed from the Tax Returns and Income Statements to demonstrate the true net income of the practice.
It is from the adjusted net income that the buyer will receive the return on his/her time and investment, and service any debt incurred with the acquisition of the practice. Additionally, it is from calculation of the adjusted net income that the true cost of operations can be developed. Subject practices are analyzed using both a capitalization of earnings approach and an assets summation approach. The information analyzed includes:
U.S. Income Tax Return forms for 3 years
The most recent Income Statement
A proprietary ADS Profile Questionnaire
A depreciation schedule for the subject practice
An equipment evaluation
An in-person interview with the practice owner
A site visit to the subject practice
Financial information provided by the owner’s accountant
As you can see, there is a lot of information and analysis that goes into developing a professional valuation for a dental practice. The selling doctor is in the best position to get the best price for their practice and a smooth transition when they are armed with a quality valuation.
The Bottom Line:
The cost of a valuation is very much linked to the opportunity cost that you are willing to risk. It is highly recommended that a doctor should arm himself or herself with a quality valuation to get a precise report on the practice, know when they are ready to sell and if the practice is in the best possible position. A professional valuation will allow you to make any improvements to increase the value of the practice prior to the sale and supply you with documentation on the market value of your practice.
This all leads to a much smoother transition of your practice, makes negotiation and financing easier, as well as enabling you to collect the correct price for all the years of hard work you put into building your practice.
This is written by Jed Esposito, MBA, CVA, is a principal of ADS Precise Transitions. Mr. Esposito has been providing practice management transition and valuation services in the U.S. since 2003.
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