Preparing for transition
Transitioning Your Dental Practice: Determining the Price and Value
We are currently seeing a significant number of dental practice transitions among our clients. This appears to be due to the general uncertainty in the health care industry, declining reimbursement rates, rising costs, expectations of higher future tax rates, and an increasing number of dentists approaching retirement age.
The sale or purchase of a dental practice, whether an immediate or phased sale, is often one of the most significant transactions that the seller or buyer will enter into.
“The seller wants to make certain they get the highest price possible and the buyer is looking for the lowest price possible — after recovering from sticker shock,” says David Thompson, a health care partner with CliftonLarsonAllen. “The fair market value of the practice is usually somewhere in between. These transactions are not for the faint of heart.”
Both the buyer and seller should consult with valuation professionals, preferably those who have valued a significant number of health care (and more specifically, dental) practices.
Valuation practitioners have substantial training and experience in business valuation. Look for any one of these credentials when hiring an appraiser:
- ASA (Accredited Senior Appraiser), sponsored by the American Society of Appraisers
- CVA (Certified Valuation Analyst), sponsored by the National Association of Valuation Analysts
- ABV (Accredited in Business Valuation), sponsored by the American Institute of Certified Public Accountants
- CBA (Certified Business Appraiser), sponsored by the Institute of Business Appraisers
Types of valuation engagements
Business brokers often assist the seller in setting a price. However, buyers should not assume the broker is acting in their best interest and should seek independent and objective advice. A credible business valuation under the fair market value standard can be useful for both the buyer and the seller in determining a reasonable price.
Engaging a valuation professional can involve different levels of service, including:
- A consulting engagement where the valuation professional assists in reviewing the financial documents (and other information) to determine the reasonableness of a given price. No written valuation calculation or conclusion report is prepared.
- A calculation of value is where the valuation professional and the client (usually the buyer) agree on the specific valuation approaches, methods, and procedures, and the process results in a written report. It generally does not include all the procedures required in a valuation engagement that results in an opinion of value.
"More care should be taken when relying on a calculation of value for setting the price, as the results may differ significantly from the value conclusion determined in a full valuation engagement"David Thompson
- An opinion of value is where the valuation practitioner (independent of the client) determines the valuation approaches, methods, and procedures, and produces a written opinion of value. The value reported in this process is more likely to represent a reasonable price for the subject practice if developed under the fair market value standard.
“This would be the most expensive level of service, as the valuation expert must adhere to all of the professional standards and perform all of the necessary procedures in developing an opinion of value ... Given the significance of the transaction, this level of service may be more appropriate.”David Thompson
CliftonLarsonAllen’s valuation professionals recently reviewed a calculation of value prepared by a local accountant (with no additional training in business valuation) of a specialty dental practice. The subject practice had gross receipts of $1.7 million in 2011, reasonable overhead levels, and appeared to be a well run practice. The calculated value was $2 million. Our professionals were tasked by the buyer to review the calculations. Based on discussions with the buyer (who works at the practice), and our preliminary calculations, we estimated the value to be closer to $1.1 million! In our consultations with the buyer, we determined that there were significant errors in the assumptions made by the seller and their accountant. These errors resulted in a price/value difference of $900,000. We are now working with representatives of the seller to modify the selling price.
How we can help
Many of our valuation professionals are also certified public accountants who can help you determine the appropriate price and value of a practice. Whether you are a buyer or seller, we can guide you as you contemplate one of the most significant transactions a dental practitioner will make.