Monday, July 15, 2013

Trust Dental Practice Valuations to a Certified Valuation Analyst (CVA), or else...

Recently, a wide variety of folks posted information about how to value a dental practice on Dentaltown. I can only say my perspective comes from hundreds (if not thousands) of valuations of practices for purchase.

You can get some really good information from P&Ls, do not ignore them. Always begin with tax returns and support with P&Ls and PM reports. Many tax preparers will lump expenses together for tax preparation - P&Ls will likely show the details.

A quick example: tax returns had office supplies & expenses of around $60k on revenue of around $900k. The broker who was selling eliminated $50k stating "normal" office supplies & expenses should be 1.5%. P&Ls showed dental supplies of $50k and broker missed it. The tax preparer had combined them into one item on the return.
Who wants to tell me how $50k less in profit impacted the asking price?

Production directly impacts overhead, not cash flow. Cash flow is simply the result of collections minus expenses.

Do not ignore production information/reports, they should support tax return collections and provide soooo much more information about how the collections are generated as well as provide clues on unusual overhead stats.

Another quick example: assessing a practice tax return collections were $100k higher than PM reports. As we inquired about the difference we learned seller was earning $100k/year as an independent contractor, in someone else’s practice, an hour away! That income was not related to the practice being sold.

Who wants to tell me how $100k less in profit impacted the asking price?

You see, in both cases the tax returns were truthful, nothing wrong with them, however, they were used to "price" the practice and nothing else was looked at.

Gather your data, analyze it, verify it, support it, verify it again - then confirm it. 

It’s called due diligence!

Tim Lott, CPA, CVA - Equity Member Dental CPAs 

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