Dental Practice Valuation Issues – What a Seller Can Do

During my many buyer representation engagements I tend to see some common issues when it comes to practice valuations that sellers could have avoided to help maintain their practice values. Here are some of those areas.

1. Clean Record Keeping:

Remember, buyers and their advisors will be picking over your information, it’s like inviting someone into your home, and you want it to be clean. Your practice books and records should be the same way, clean, easy to read, and at your finger tips. For example, your Quickbooks file should match the tax return numbers and if not to the dollar, pretty darn close and easy to match up.

2. Complete and Accurate Practice Management (PM) Reporting:

Make sure your PM software is current and accurate. You should be recording production, adjustments and collections by provider. Clean up your accounts receivables WELL before you plan on selling.

3. Don’t Coast:

This is one of the worst things a seller can do prior to selling their practice. It decreases dentistry production and therefore, decreases practice revenue which buyers AND bankers do NOT like.

4. Don’t Reduce Your Hygiene Hours:

Let me correct myself, THIS is the worst thing you can do. Not only are you reducing your practice revenue, you’re potentially losing patients as well.

5. Update Office Appearance and Equipment:

Again, just like a house, an outdated décor with old equipment will generally create less excitement with a buyer and less excitement means a reduced offer. Create excitement with your buyers with current décor, updated equipment and a fresh appearance.

6. Overpaid Staff:

Be aware of your staff compensation and make an effort to make sure it stays within “market” for your area. There’s nothing wrong with showing appreciation to your staff with discretionary bonuses, fancy trips, paying for CE travel, etc., however, make sure they’re aware that these are not customary fringes so they don’t come to expect it from their new boss.

7. Inflated Overhead:

Well before you sell, I’m talking 2-3 years ahead of time, begin to evaluate your practice overhead expenses and make sure you’re ONLY spending on things you NEED. I’m not talking about skimping on updated equipment; I’m talking about wasting money on unnecessary supplies, small toys, unnecessary services, etc. Become a good CFO! Profits will drive value most of the time and wasted overhead eats into your profit and will usually drive down the value of the practice.

8. Office Policies and Systems:

Well before you sell, make sure you have excellent operating systems and policies. If you’re not collecting a patient’s portion of the fee at the time of visit, make that change now. If you don’t take credit cards, start taking them. If you’re not running daily, weekly and monthly management reports, start doing so.

9. Track Your Referrals:

At least one year prior to a sale, begin tracking the procedures you refer out every day and be prepared to provide your broker with some really good, accurate information for the prospective buyers.

10. Don’t Change or Eliminate any PPOs Prior to a Sale:

This can backfire if you begin to see fewer patients even if the revenue stays about the same. In most cases when a practice decides to eliminate PPOs, there’s a transition period where you’ll have holes in the schedule. Those PPO patients that opt NOT to come back for their scheduled recare appointment or follow-up work will in turn cause revenues to be lower for a period of time.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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Dental Practice Valuation Questions

When calculating the value of the practice is the value of the equipment on the balance sheet used or the tally of the itemization?

I'm in the middle of a practice acquisition after an agreed upon price.... getting to the final hours and finding out now the hand pieces , supplies, front office furniture are not staying.........seller says if you look on the list it's not on there......

My argument though is that it's part of the appraisal. It's the # on the balance sheet that is going to be used for the depreciation schedule… it's the number the appraisal uses in determining the value of the equipment........Not the itemization of the equip list; Seller feels like it's personal effects.....and why he never put it on the equip list....

So we go round and round.... he equates it to when you look at a house you don't expect to buy the pots/pans, dishes that you see when you buy a house.........

I equate it to... I'm buying a business and the ability to do business......

In hopes for further discussion as I feel it’s important since I will want to become a potential seller at some time:

What if the practice was appraised for X amount of dollars using a defined list of equipment used to derive an appraised value which would not be part of the sell which may include fun toys like Cerec, electric hand pieces, and specialized bone grafting tools. How about first class office furniture, let’s say: Snake skinned lounge furniture or a 2K dollar waiting room massage chair from Brookstone, something to that nature. Of course this would be disclosed up front to any buyers what’s not for sale and what isn't before any offer was made by the potential buyer. Do you think this is an appropriate way to approach this?

I'm curious as I plan to sell my at some point and uncertain to these measures as I personally stockpiled tons of equipment before I created my own practice and unsure if I would want it included in the appraisal value, especially new equipment that I do not intend to sell that hasn't been part of running a business yet.

Obviously I want be fair and honest about this in the future...

Your input is greatly appreciated


(Jason Patrick Wood responds):
 
Very simple. You don't get extra value on a dental practice because you have more bells and whistles than the guy down the block. Banks lend on your production figures, not on whether you use a CEREC machine in your office. Most "big ticket" items are actually harmful to a transition going forward specifically because the Seller believes they should get money out of the practice for these items. However, you buy big ticket items (or you should) to either lower your overhead, increase production, make your life easier or a combination of the three. As a result you are typically already having the value of the practice grant a "value" to that piece of equipment if you have utilized the equipment effectively. It is just a hidden value (i.e. CEREC machine reduced overhead by 5%, as a result my practice is more profitable, as a result I can command a higher value to my practice based upon comparable dental practices).
 
(Tim Lott responds):
 
If you have the appraiser’s name, ask the appraiser if their appraisal specifically excluded any assets or supplies. They're the ones that appraised it.

As Jason said, generally a practice appraisal assumes everything stays. Many times this issue gets addressed during the LOI stage. As one who represents buyers I want to make sure as soon as possible that the price includes ALL assets, supplies, intangibles, websites, web addresses, phone numbers, and even the use of sellers name as buyer sees fit for a period of time, according to state laws.

Most sellers will also state very soon in the process which "personal" items they wish to exclude. As one that values practices one of the questions we ask is if there are any assets excluded from the sale and we'll state that in our report or practice profile if we're selling the practice.

This seller is trying to pull a last minute fast one and unless there was ANY indication that these items were to be excluded when the price was agreed to I'd be looking to reduce the price already agreed to.

Good Luck!


Tim,

Thanks for your input and that makes complete sense. Its about clarity for the buyer so I would definitely aim to disclose what would be part of the sale and not for sale during and LOI. Unfortunately I think LOIs are non-binding in the State of Texas, from what I hear.

(Tim Lott responds):
 
I understand about non-binding. Still, it doesn't have to be binding to have an understanding. Even in a non-binding LOI, if the seller says the price is $xxx, xxx and it includes all assets, supplies, etc. In the event the seller tries to pull a stunt like this in the legal agreement phase, guess what: the price that was stated in the LOI no longer applies since the assets have changed. It can open up everything that was stated in the LOI for re-negotiation & that's never good.
 
This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

For more information or to sign up for our newsletter, please contact arose@dentalcpas.com

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Dental Practice Value for a Deceased Dentist's Family

I have a close friend that passed away last week unexpectedly. He had a heart attack at age 54 with no prior symptoms. It really was a bummer. His wife has a prospect to buy the practice. He’s a good guy and it could work out perfectly. The big question is the value of the practice.

I've heard one formula for determining "good will" is to take the annual gross average for the past three years and multiply times 40% for the value of the "good will" of the practice. Equipment, etc. is not included with this value.

Please let me know your thoughts and comments. We need to get this deal "up and running" for the sake of this family ASAP.

There are many formulas and rules of thumb. However, instead of relying on the rule of thumb methods and potentially leaving a lot of value on the table, the spouse should hire someone who can assess the reasonable "range of value" without needing or having to pay for a full blown valuation report. There are many transition professionals that can provide this service, even brokers. If you decide to try a broker, simply let them know that at this time all you need is to have them assess the range of value, assuming you're pretty sure you have a buyer. If for some reason this buyer falls through, at least you've already have a relationship with a broker who may be able to find you another buyer quickly. Good luck.

Tim,

Could you do the valuation from the P&L and balance sheet, without seeing the practice?


Yes, I can determine a "range of value" from good financial information. It’s what I do for our buyer representation clients. I’ve never stepped foot in the office of most of my buyer representative clients, what do I know about the working condition of the equipment? I’m not an equipment vendor or specialist.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

For more information or to sign up for our newsletter, please contact arose@dentalcpas.com

Follow us on Twitter, Facebook and Pinterest

Dental Practice Valuation for Deceased Dentist's Family

I have a close friend that passed away last week unexpectedly. He had a heart attack at age 54 with no prior symptoms. It really was a bummer. His wife has a prospect to buy the practice. He’s a good guy and it could work out perfectly. The big question is the value of the practice.

I've heard one formula for determining "good will" is to take the annual gross average for the past three years and multiply times 40% for the value of the "good will" of the practice. Equipment, etc. is not included with this value.

Please chime in thoughts and comments. We need to get this deal "up and running" for the sake of this family ASAP.


There are many formulas and rules of thumb. However, instead of relying on the rule of thumb methods and potentially leaving a lot of value on the table, the spouse should hire someone who can assess the reasonable "range of value" without needing or having to pay for a full blown valuation report. There are many transition professionals that can provide this service, even brokers. If you decide to try a broker, simply let them know that at this time all you need is to have them assess the range of value, assuming you're pretty sure you have a buyer. If for some reason this buyer falls through, at least you've already have a relationship with a broker who may be able to find you another buyer quickly.

Good luck.


Tim,

Could you do the valuation from the P&L and balance sheet, without seeing the practice?

Yes, I can determine a "range of value" from good financial information. It’s what I do for our buyer representation clients. I’ve never stepped foot in the office of most of my buyer representative clients, what do I know about the working condition of the equipment? I’m not an equipment vendor or specialist.

This post first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

For more information or to sign up for our newsletter, please contact arose@dentalcpas.com

Follow us on Twitter, Facebook and Pinterest

Dental Practice Valuation Questions

Here is an exchange I had with a dentist recently on how to value his practice.

Can anyone tell me their thoughts on how you value a practice that is 90% PPO. Is there any good will with this type of practice?

Probably, even though it is a PPO, patients usually have choices on dentists within the PPO network, so the fact that they're choosing your practice over another means something.

I am currently practicing with my father and am a 49% owner in the practice and am trying to determine how we can set a value on our shares to determine a buyout.

Have the practice pay for a valuation specifically for this purpose. A valuation professional with experience in dental practice valuations AND who isn't looking to broker the practice will be perfect.

I am producing 150 to 200,000 more per year than he is without including hygiene while seeing the same number of new patient prophys.

That’s generally a compensation issue, NOT a valuation issue.

He seems to think his shares are just a valuable as mine even though I have produced somewhere around 900,000 more than he has in the last seven years while only making 50,000 more in those years.

Was some form of agreement for you to earn less and work more (sweat equity?) Shares are valued the same and what you have is a compensation issue. Now if you're going to argue that you shouldn't have to pay full price for his half because of the compensation arrangement.....well I hope it doesn't blind side him.

Yes, he has been here 30 years but most of the patients that have stayed with him have only stayed because we were on their plan. Our philosophies are so different and I am trying to determine a buyout plan or exit strategy. Any thoughts would be great.

Hopefully he's on board with the thought of a buy-out plan or exit strategy. If he's not, it may not matter who you get to value and assist with your ideas. The only way it'll fly is if he's on board and he'll probably want some input. I know I would.

This post first appeared on DentalTown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

For more information or to sign up for our newsletter, please contact arose@dentalcpas.com

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