Understanding the Fair Market Value of Your Dental Practice

Understanding the Fair Market Value of Your Dental Practice | Image Credit: © May1985 - stock.adobe.com

There are many items to use to assist in determining the fair market value of a dental practice. The income of the dental practice is a significant factor in making the determination of the dental practice value, but it is not the only point that should have input into determining its value.

Based on the number of dentists, hygienists and other gross revenue producing parties that work at the dental practice, there are questions about the personal goodwill and the enterprise or dental practice goodwill. The production reports of the dental practice and projections of what these people will continue to produce are very meaningful for an evaluator to consider before finalizing the valuation. These are important for a dental practice evaluator to understand, especially if the dental practice is going to be sold soon.

A buyer wants to know what his or her projected income is going to be since when it is time to go to the lender for the funds to secure what is needed to acquire the dental practice, the bank will want to know what is available for them to receive that the borrower must earn to pay them back. The owner/operator of the dental practice usually has a general idea of what the fair market value of the dental practice is, but during the preparation of a dental practice for litigation, an independent party should prepare the valuation. This is because the courts see the owner/operator of the practice as being self-serving if he or she prepares the valuation and as not being objective. This may or may not be correct but almost all courts, mediators and arbitrators have this preconceived notion that the dental practice owner will be prejudiced in favor of himself or herself.

The owner/operator of the dental practice can offer valuable insights to the dental practice valuation expert while he or she is preparing the fair market value appraisal of the dental practice that the evaluator would not have otherwise known. Not only will this save time and money, but it will also help the evaluator have a more accurate understanding of the dental practice. In the event of litigation in the court room, this additional insight from the owner will allow the valuation to be more in depth.

The practice may be put on the market soon and the owner will expect a fair market value presentation that is correct but also as high as it can be with as much substantiation as possible.

Assuming that dental practice in the past years has had its tax returns filed and financial statements prepared, the evaluator should not change them. If they are to be changed this should be accomplished by a dental CPA who used reasons that are acceptable to the state boards of accountancy with plenty of footnotes as to why these reports are being changed. The appropriate reasons should be foot-noted on the financial statements so there are few questions as to the appropriateness of the changes. Since the restated financial statements and tax returns will have a cost associated with them that will probably be high, the owner will want to make sure the changes are as accurate as they can be and as helpful as well. The support for these changes is critical to the presentation of the revised financial statements and tax returns. These reports will be reviewed by potential buyers including in these times, dental service organizations (DSOs), who want to get their foot into as many doors as possible. The DSOs especially have large legal and accounting teams who will review the older tax returns and financial statements and compare them to what was just changed to search for any misstatements and material changes and to question them no matter how well they are supported.

The personal and dental practice goodwill

Based on the gross revenue of the dental practice, many of the personnel may be producing it and not just one or 2 employees. If this was the case, it would mean in general, that there is a lot of enterprise goodwill and much less personal goodwill attributed to each of the producers. If the dental practice was to be sold and it remained intact with its employees upon the sale, its value would be high. Each dental practitioner, hygienist and any other producer of gross revenue would have personal goodwill which would probably not add up to the 100% of enterprise goodwill when discounts for minority share production was involved. This would be a case where the sum of the parts on a discounted basis would not equal the whole. Just like if one of the gross revenue producing employees were to be involved with a divorce, the same discounted value for each person’s personal attributed goodwill on a discounted basis would be less than if all the employees’ production were to be added as part of the whole. There would be no discounts since the practice would remain intact and the total value would be at 100%. The individual portions of goodwill would be heavily discounted by the evaluation expert.

The estate value of a small practice compared to a large one

In the event of the death of the principal or only owner of a small dental practice, the value of that person’s interest and the dental practice as a whole would suffer instantly. Since there would be no one or limited personnel to take over the responsibility of the deceased very quickly, the gross revenue and net income of the practice would fall almost immediately. This would force the value to drop as there would be fewer dentists out there who would be interested in a practice with expenses that were still high and gross revenue that was dropping. A potential buyer would have a problem obtaining financing since lenders would shy away as well.

For more columns from the author, go to https://www.dentalproductsreport.com/practice-management.