Relying on outdated dental practice valuations

May 26, 2016 News

When to find out the value of your dental practice—and when to sell.

By Bruce Bryen, CPA, CVA

 

It is difficult to convince a dental professional to retain an expert and then suggest that the dentist pay for the preparation of a practice valuation. Many practice transition brokers tell the dentist that they will produce a valuation for free. The experience is troublesome since many dentists think they know the value of their practice and shouldn’t have to pay someone to tell them what they already know. Unfortunately, things don’t quite work this way when attempting to transition a practice.

A self-prepared valuation or one made by a broker looking for a commission on the sale frequently inflates the value of the practice. This is looked at by independent practice brokers and lenders with a jaundiced eye because these types of brokers have reputations for presenting valuations that purport a worth that is not realistic. Lenders also get to know people who prepare valuations that are well above a potential sale price since they are designed more for the sales and commission agreement than to give the seller an honest opinion of value. The importance of this appraisal prepared by a qualified representative is vital to selling the practice at a legitimate price.

Receiving a valuation, then procrastinating

Selling the dental practice presents a professional transition as well as an emotional and personal lifestyle change. It creates a new world for the seller. From going to work every day and seeing the same staff, office, and similar schedules from years of working a specific routine, to now waking up and not having the responsibility creates a new outlook on the world.

This is a passage of identity and may end up being deferred because he or she can’t quite get ready for this dramatic event. The sale sometimes is postponed until the valuation becomes outdated and a potential buyer (and the buyer’s lender) won’t rely on the old data and value, especially if the seller is approaching retirement and has slowed down with lower revenues and profits reported after the valuation date. With such a financial and emotional period, it is understandable that someone is not quite ready to forgo a lifestyle consistent with that of a successful dentist.

The right time to transition

In a scenario where a reliable practice valuation has been obtained, it is important to sell when there is a legitimate offer in order to achieve the worth of years of effort. There is no real set time limit, but a valuation that is outdated may create questions and a request for more current financial data. That is not a good thing because of the time, effort, and cost expended to obtain more information.

For the dentist who is slowing down, this definitely will reduce the price since the gross and net revenues will most assuredly fall when contrasted to the valuation information. For a younger dentist who wishes to sell, it is possible to put in additional effort to enhance the value of the practice compared to the valuation. If that is the situation, it is probable that the original valuation’s cost and time frame was rushed since more positive results appeared after the valuation date. In a situation such as this, the dentist should wait for the best financial data before retaining an expert to prepare the valuation.

An older valuation’s effect

The longer a seller waits before transitioning his or her practice and the lower the results of the operations that a buyer sees after the valuation date, the less the seller should expect to receive. The argument can also be made that if the results of the practice efforts produce better gross and net incomes, the more a seller can use those amounts after the valuation date to produce a higher value. No one knows what the result will be after the valuation has been prepared.

Using a professional

Working with a professional practice evaluator with credentials such as CPA, CVA, or other such designation, and revealing the best face of the practice results will allow the best price in the quickest time frame. It doesn’t pay to have the valuation prepared until the right time. When that occurs, arrange with a good practice broker who has nationwide contacts or marketing ability to have as many dentists looking at the practice as possible.