Do You Need a Dental Practice Valuation?
By Trent Watrous, CPA, CVA, CFE
Regularly, I receive the question from dentists about whether they need to have their practice valued. No hesitation in saying….great question! A properly completed practice valuation can be an excellent tool in understanding the “value” present in any dental entity.
The first situation in which I would recommend obtaining a dental practice valuation is if you are selling your dental practice in the very near term. Don’t allow a rushed sale to potentially cause you to “leave money on the table” because of a lack of awareness of the correct value. Setting the correct asking price for the practice demands that someone on your behalf critically analyze your assets, cash flow and potential comparability to other practices in the area. Don’t trust the buyer’s advisor to determine the value of your practice or attempt to apply a recently viewed valuation in determining your entity’s value.
The next situation I would recommend that you obtain a dental practice valuation is if you are planning a practice transition in range of 2 to 5 years in the future. Why? Knowing which attributes in your practice do and do not bring value is critical to knowing which changes in practice to make that will ultimately increase the transaction value. Often, I assist in transitions where certain practice attributes were unknown or not recognized by the existing practice owner. The lack of awareness allows the buyer to negotiate downward the transition price, given the seller is now ready to make a sale happen now. As an experienced dental practice valuator, the use of a valuation to plan for a future sale can bring the greatest return on investment for having a valuation completed.
A valuation can also be of assistance in financial or estate planning. Many practice owners perceive their practice to be a smaller part of their overall financial picture, not realizing the practice is a much larger “asset” in their portfolio. If your dental practice represents more than 25% of your total net worth, without hesitancy, I recommend you have a practice valuation completed every four years. Annually, as you discuss asset allocation in your portfolio with a financial adviser, you should also be able to discuss what changes must occur in your practice to maintain the asset as the primary income earning asset that funds your retirement plan.
Last, are you considering adding an associate with a contract allowing for a “buy-in?” Have a valuation completed! Why? Do the contract terms you plan to offer the associate correctly maximize the value for you when the associate acquires ownership? All too often, the contract terms offered do not address the continual increase in practice valuations being observed in the marketplace. Ensuring the practice valuation numbers and the contract terms providing for an associate to buy in match correctly will prevent a seller from losing an opportunity to monetize the value created from years of hard work.
As a Dental-specific Certified Public Accountant, I strongly encourage both buyers and sellers in dental transitions to have an independent valuation completed by a third party. When both the buyer and seller rely on a single valuation prepared by the broker, I find after the transition parties carry a sense of regret from the lack of having their own advocate. Retain a licensed professional to prepare a valuation on your behalf to avoid the post transition closing blues.
Don’t hesitate to leverage the knowledge contained within a dental practice valuation to maximize the value of your dental practice, whether now or in the future!
Trent leads the Dental Services Practice at WSW CPAs.