When should you get an appraisal? Definitely when you’re the middle of embarking on a sale. Here’s why:
Start of the Sale Process:
- Assessing the current value of your practice (which we at DMC can offer without a formal appraisal).
- Putting team members on proper contracts (which could take a long time to implement).
- Reviewing / dealing with landlord / lease issues to deal with the viability of your lease (e.g. you need at least 12 years left on your lease and no nasty demolition or relocation clauses which could prevent a buyer from getting bank financing).
- Reviewing / dealing with your corporation and its financial statements to ensure that it is clean when you go to sell and that the shareholders qualify for the lifetime capital gains exemption (up to $250k in tax savings per person!).
- Gather all relevant due diligence information (e.g. HARP reports, x-ray floor plans, financial statements, employment agreements and associate contracts, production reports, lease documents, material contracts with third party service providers, etc.).
Middle of the Sale Process:
- Get an appraisal from a reputable appraisal company that will help get you through due diligence intact (not some overhyped appraisal that won’t draw a crowd to the open house, won’t result in multiple offers, and won’t get you through the due diligence process without you taking a big price hit).
- We (dental lawyers) prepare all the relevant legal documents – including letter of intent (which sets out the key terms) corporate re-organization documents, employment agreements for your team, lease transfer documents (if the landlord is OK with us doing that), purchase and sale agreement, associate agreement for you, closing agenda, closing documents, etc.
- We (dental lawyers) reach out to your secured creditors (people you / your dental practice owe $$$ to and which we’ll need to pay out as part of the closing).
- We review all the legal paperwork with you so that you’re well educated on what needs to happen next.
- We market and run the open house and help facilitate interviews with prospective buyers at your office.
- We work with your accountant to execute any kind of corporate purification or reorganization so that you can hopefully pay the least amount of taxes on the sale.
End of the Sale Process:
- We finalize the legal documents and everyone signs.
- We close the transaction after all conditions have been met, satisfied or waived, the lease has been effectively transferred to the buyer and and bank financing is in place.
- You start your associateship pursuant to the terms of your associateship.
- We (dental lawyers) pay out all secured creditors.
- We (dental lawyers) provide an accounting for everything that went into our trust account and we provide you with our invoice.
- You and the buyer start the process of transferring over the material contracts (third party service providers – like internet, fax, marketing, utilities, maintenance, etc.).
- You consider joining us on one of our dental outreach programs and donating money for equipment upgrade purchases or sponsoring hygienists to participate in our Caribbean sealant program.
So as you can see above, you getting an appraisal comes HALF-WAY through the sale process.
Now, on the issue of whether the appraisal is more art than science, I can tell you this: in my humble opinion, while it draws on objective elements (both macro factors that affect all dental practice values and micro factors that affect the value of your particular practice), it’ll really come down to a subjective determination. Someone needs to assign a value to the dental practice. And while you the seller will definitely want and try to paint the rosiest picture possible, the REALITY of selling and having a real-life buyer go and borrow money to buy your practice will make you come to terms with what a REAL person is willing to pay.
So we start off with objective macro factors, like:
- Interest rates
- Inflation
- GPD
- Consumer Spending
- Property Values
- Fair Market Rent In Your Area
- Labour Shortages
And that sets the tone of what buyers are faced with when going to borrow money to buy your practice. So if things aren’t that great when it comes to interest rates and inflation and property values in particular, you’ll find a downward pressure on the value of your dental practice.
And within this context, we look at micro factors, like:
- Your location
- Number of operatories (both equipped and plumbed and wired)
- Number of active patients (anyone who’s been at your practice in the last year for any type of treatment and who comes regularly)
- Production vs. collections
- Management of certain expenses (wages, rent, supplies, etc.).
- Opportunities for the buyer to expand production (e.g. equip more ops, take over more space, do more marketing, keep the practice open longer or more days per week, bring in specialists, keep referrals in house, etc.).
- Cash Flow – also Called Normalization of Net Income of EBITDA (which stands for Earnings Before Interest, Taxes, Depreciation or Amortization). Typically, more sophisticated buyers will buy a practice based on a multiple of the cash flow. This number basically looks at money coming in and money leaving and what’s left over. Importantly: the money leaving must be actual business-related expenses, so we don’t care about amortization (an accounting adjusting entry, automobile expenses + travel + professional development which are all personal expenses, etc.).
So when we combine the macro and the micro factors and keep in mind what buyers are looking for and banks are willing to finance, we get a range of what your practice COULD sell for on the open market at that particular time. We also compare it to the many other dental practices we’ve sold for. We also think about who among our thousands of buyers might be interested in your particular practice.
And we look at all these things and suggest a range of what your practice could sell for. Obviously, this range needs to be tested by you getting a formal appraisal from a company we recommend (not just any company, mind you as we don’t want your practice sale held up or never closing because of shoddy work). But we hope to take your practice to the marketplace based on a number that you’re happy with, which is defensible, and which is achievable. So yes we start with an objective science in coming up with the appraised value, but there’s also the reality of going through the sale process and finding the right buyer and getting through due diligence intact before we get to the FINAL PURCHASE PRICE which sticks on closing. And that’s going to come down to a lot of clever (and possibly hard) negotiating, problem solving, and subjectivity. Why? Because we’re dealing with real people, real lives, and real relationships. So the objective science tends to give way to the “art of the deal”.
P.S. if you’re thinking about selling now or in the next 5 years, make sure to reach out to us at DMC to find out how we can help you prepare, market and sell your dental practice. It often takes YEARS to get staff on contract or do complex corporate tax-planning to save you hundreds of thousands of dollars in a sale. So get in touch with us ASAP (you can contact Michael Carabash at michael@dentistlawyers.ca or 647.680.9530). We strive to get you the best deal possible and encourage you to do dental outreach with us afterwards (and recommend us to your dentist colleagues).
