Dental and dental specialty practices have substantial goodwill and their values, as compared to other professional practices, are high. The three common methods of valuing dental practices are summation of assets, capitalization of earnings and similar practices. The methodology is the same for a complete or fractional sale and purchase.
Asset Summation. The asset summation method calculates the fair market value of tangible assets consisting of professional dental equipment, office equipment, furniture, technology, dental supplies, dental instruments and goodwill (either personal to the practice owner or the practice entity). And any personal goodwill should be separately appraised! (See William P. Prescott, The current status of personal goodwill, Dental Economics, October 2016; 54,56.
Capitalization of Earnings. Capitalization of earnings is the sum a practice can pay for itself after owner compensation and operating expenses are paid over a measured time not to exceed seven years.
Similar Practices. This generalized method is usually used in destination locations where there is high demand by candidates who are looking for practice opportunities where few exist. Unfortunately, profit level is not considered.
Irrespective of the valuation methodology used, if three criteria are met, the valuation is fair: the purchaser or incoming owner must be paid; the purchaser or incoming owner must repay the lender(s); and within a measured period of time.
For the purchaser, recognize that in a complete purchase and sale, any dental practice broker represents the seller, not the purchaser. Also, the seller is fully paid in cash with few exceptions. For this reason, the purchaser’s CPA should confirm the accuracy of the valuation.
In co-ownership, the associate buy-in will almost always be internally financed as lenders will not lend on a sale and purchase of a fractional interest. If the economics of the associate buy-in are not fair, sooner or later the relationship will fail. Bottom line, be fair, realistic and reasonable.
Lastly, I am pleased to announce that my new book, Joining And Leaving The Dental Practice, Third Edition, will be released in early January, 2018, on my website, www.PrescottDentalLaw.com. Joining And Leaving The Dental Practice lays out in detail the finite practice exit and entry choices. It examines all business, legal and tax aspects of each option that your silent partner, the IRS, considers important. In addition, the three business and tax structures for and three categories of co-ownership are discussed in detail. You learn what can and cannot be done and why. Restructuring faulty ownership arrangements and implementing dispute resolution in order to avoid costly split-ups is also considered which will, hopefully, enable co-owners to work profitably and with minimum stress. Enjoy and I look forward to your questions and comments!