Comparing Dental Practice Valuations During COVID-19

By Andrey Popov / stock.adobe.com

Expert dental practice evaluators had a difficult time with their presentations of dental practice value because of the COVID-19 outbreak. The typical methodologies and standards still had to be observed with the preparation of the reports, but there were so many deviations in value that, without statements explaining what had happened to the practice and the look back to the years when the dental office was successful, the valuation itself would be terribly misleading. 

As CPA/CVAs are always supposed to be careful, preparing a typical valuation would probably harm the dental practice that was readying itself for a transition. The comparison of the valuation before the virus took over the world to one that was being prepared during and after COVID-19 had a huge difference regarding the worth of the same dental practice upon its completion. The conclusion of value with the same practice before, during, and after the results of the COVID-19 effect on the practice caused many dental offices to reduce their transition price, use creative methods of selling or take their dental practices off the market until the potential buyers settled down to reality. Some of the practices did retain experts to prepare the dental practice valuation in the most current mode as the impact of the virus started to fade. This took additional amounts of time and money, but it afforded the selling dentist a good opportunity to show potential buyers what the practice could do in terms of income, growth, and value. Looking at the before, during, and after the COVID-19 valuations in terms of practice pricing, the following paragraph is an analysis of what practice brokers were offering potential buyers by way of creativity and financing.

A transition analysis of dental practice sale prices and terms of financing for the buyer

Before the virus struck the world, dental practice evaluators would follow the standards necessary as CVAs and CPAs in order to present a dental practice valuation for transition. Most valuations should have been similar in their conclusions of value if the facts they used were similar while alternative facts were eliminated from the presentation. 

During the height of the virus it was almost impossible to prepare a dental practice valuation without extensive footnotes or paragraphs to present the dental practice in its best light and still be accurate with valuation standards. Examples would be the growth rate from the prior years along with the income after the normalization of expenses and items not necessary to operate the dental practice. During the virus, the reduction in staff, hours of operation, and scarcity of patients drove away many existing patients and prevented new patients from joining. The portrayal of these problems limited the gross revenue and net income of the dental practice while COVID-19 was taking its toll on the world. Dental practices were no different than the rest of the economy. Many practices closed and the ability to transition was limited. There was quite a bit of creativity from the brokers’ side in assisting the dentists with their transitions. Some of the offices that were sold during this time used creative methods. Securing the sale with the seller of the dental practice retaining a second position to the bank so that the buyer and the seller each had “skin in the game,” was a preferred method of the lenders during this time. An example would be if the sale price was $800,000, the bank would lend the buyer $600,000 and the seller would be expected to “lend,” the buyer the balance of the $200,000. This would allow a realistic dental practice valuation conclusion of value based on the history of the practice demonstrating the growth and income it had achieved before the pandemic. Of course, if the dental practice was on a downward trend before the virus, the dental practice valuation could not blame the pandemic for the lower valuation. 

Additional creativity during COVID-19 for evaluators to be resourceful yet prudent

The ability of the dental practice evaluator to use their skills to prepare an accurate evaluation was still the most critical piece of the puzzle for the dental practice owner since the prudent purchaser would want to rely on the valuation because it would be prepared in a totally independent manner. The practice broker, while not stretching the truth of the valuation conclusion, was definitely trying to sell the dental office. Using the expertise of a creative practice broker, ideas were employed such as what is known as an “earn out.” The buyer and seller may have been apart while using the valuation as a guideline, but the seller wanted to sell, and the buyer wanted to buy a particular practice. The creative practice broker suggested the “earn out,” model where there was a lower price for the transition but there was also a formula where the seller would earn more if the buyer was able to achieve certain levels of success that the buyer and seller agreed upon in their sales contract. Of course, if the buyer did not reach the agreed upon goals, then the buyer did not pay more.

This concept was satisfactorily presented to the lender who accepted this concept readily once they understood that it was of benefit to the buyer and to the seller. While using this model, the dental practice evaluator had their valuation relied upon completely by the buyer, seller, dental practice broker, and the lender. If there is a new normal, we may be in it now.

Today’s dental practice valuation after the huge impact of the COVID-19 virus and the presentation by dental practice evaluators 

Now we are approaching the “before,” of the COVID-19 virus impact. It is not completely “before,” but certainly more so than when the pandemic first struck the world. Today’s dental practice valuation may still have to account for downward results during 2020 and how that affected the worth of the potential dental practice valuation and transition. For those dental practices that overcame the pandemic and whose gross revenue and profit rose, the dental practice valuation could highlight those results as being somewhat exceptional. Of course, this is as long as the wording does not interfere with the methodologies, standards of value, and any other point necessary for the completion of the valuation in an appropriate manner. If past results were on a downward trend, blaming the pandemic should not change the evaluators mind as to the conclusion of value being less than what the dental practice owner hoped.