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Are all Practice Appraisals Created Equal?

By February 16, 2021February 21st, 2021Buying a Practice, Selling A Practice

One of the calls we get at least once a week is a dentist asking, ‘What’s My Practice Worth?’ For a baseline range of what your practice could sell for right now, we would need to look at 3 key things: Location + Metrics, + Opportunities. For more on how these metrics affect the value of your practice, read our previous post here. But for a more comprehensive valuation of your practice, you will need a full dental practice appraisal.

What is a dental practice appraisal?

A dental practice appraisal (which is also referred to as a ‘practice valuation’) is an internal analysis of the practice’s assets and financials plus an external analysis of the environment combined to give a monetary value to the practice. This is typically done by a professional valuator or an accountant. The assets in an appraisal valuation are tangible assets (equipment, instruments and supplies, leaseholds, software) and intangible assets (goodwill). The valuator will specifically look at things like:

  • goodwill (e.g. trademarks, proprietary systems, dental records, patient lists, etc.)
  • leasehold improvements
  • equipment and furniture
  • inventory and supplies
  • future opportunities

When would I need an appraisal?

There are many reasons that you might need to know the value of your practice, including:

  • Sale of a practice
  • Purchase of a practice
  • Associate dentist buy-in
  • Additional shareholders or partners
  • Transfer or gifting of a practice to a family member
  • Incorporation, asset rollovers or tax purposes
  • Partnership breakup
  • Divorce settlement

We have worked with many dentists in all of these situations, but the sale or purchase of dental practices is the most common for our clients. So we will use that as our example today.

Are all appraisers equal?

Although you are getting a number at the end of the day, the dental practice valuation is not purely mathematical. It isn’t uncommon to have the same practice appraised by two different services resulting in wildly different values in the end. Like most things, there are varying degrees of quality in dental practice valuations because there is no standardized method. You can receive anything from a two-page summary to a 40-page comprehensive report. And sadly, many appraisals we see are incomplete, deficient, and inaccurate.

Sometimes the issue is based on a lack of detail and knowledge on behalf of the valuator. Too often, we see appraisals done by generalists who don’t know the dental industry’s nuances. They use a boilerplate template that doesn’t factor in nuances of the practice, the history of the practice or strengths and opportunities for prospective buyers. This lack of experience with dental practice valuations specifically causes huge discrepancies because it is these intangible assets that typically account for a significant portion of the appraised value.

But the most dangerous reason behind the difference can come down to how the appraiser is compensated. Certain appraisal companies are known for being very aggressive in their valuations. For example, if a dentist looking to sell their practice hired a real estate salesperson (often called a broker) to do the appraisal, that person would have an incentive to value it at the highest possible sale price to create a better picture for their client and maximize their potential commissions. But this comes with the risk of an unrealistic valuation that could cause a lending bank to deny financing or cause a potential buyer to walk away.

Is my appraisal accurate?

It is essential that you not only get your own appraisal prepared but you engage an honest, professional, and unbiased specialist. Someone you can count on to give you a realistic idea of your practice’s fair market value. A detailed and industry-based appraisal can often be determined by their valuation strategy in four key areas.

Recurring Active Patients

Appraisals often include patients who attended the practice in the previous 12 months. However, a good analysis will also consider the pattern of those patients and how often they return, if at all. Active and recurring patient numbers are required to assess the true revenue per patient and opportunities to improve margins and profitability.

We have seen cases where, in preparation for a sale, a dentist has increased the number of one-time patients through marketing, discounts, etc. This created an inflated active patient number in the appraisal. Unfortunately, a dentist relying solely on that active patient number to cover expenses and debt financing costs would face a harsh reality when realizing the represented patients are not “true” patients of the practice.

Insurance/Co-Payments

In general, appraisals detail whether the practice is actively collecting deductibles and co-payments. Unfortunately, though the appraisal may state that co-payments are being collected, that may not be the case.

We recently conducted due diligence at a practice and found that the office was regularly writing-off uncollectable amounts. The financial records showed the dentist recently started collecting a low flat-fee, which can be a strategy to increase the practice’s sale attractiveness by attempting to improve historical co-payment issues. But ledgers showed the practice losing patients due to attempts to enforce a co-payment strategy. Notably, patients indicated they would not be returning if attempts to collect continued. Though the appraisal noted co-payments were being collected, they actually were not, and it would have been a sobering reality for our client to realize that after the fact.

Types of Treatment/Service Reports

Appraisals often include patients who attended the practice for any type of dental treatment. But there is a big difference between patients who came in for preventative work versus restorative. If the patient list is predominantly restorative, the patients are likely more reactive and not recurring active patients.

Postal Codes and Demographics

Appraisals include all patients who attended the practice, despite age and distance travelled. Postal code analysis should be conducted to estimate the proportion of patients who live close to the practice. On a transfer of ownership, it is more likely that patients who travel longer distances to their dentist will relocate to closer practices. Demographic analysis will also assist in predicting future production from patients based on age models.

Cash Flow Analysis

These days, cash flow is king. So a proper and thorough cash flow analysis with notes to explain specific, verifiable adjustments is essential. Too often, appraisals make generic adjustments to create a higher cash flow without looking at the specific dental practice to understand the reason behind the levels of various expenses. With the current trend of purchasers offering a purchase price as a multiple of cash flow, the appraisal must get this correct.

Bottom Line

Generally, you’re getting an appraisal for a specific purpose, not just for the fun of it. That is why a professional, accurate and comprehensive appraisal is essential. After a decade of looking at dental practice appraisals, we can assure you they remain as important and relevant as ever. And throughout that time, the appraisals that benefit our clients the most come from Dental Strategy.

If you have any questions about an appraisal you have received or want to have your own practice appraised, let us know. We only work with dentists, so we know the right things to look for and the right people to connect you with. We are focused on helping ensure you and your business are protected. Send DMC an email or give us a call at 416-443-9280

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