The first step in selling your dental practice is to have it appraised. An appraisal provides a benchmark to show what the practice may be worth. This will help with the price negotiations. And appraisals are typically required for banks who will be financing the deal for the purchaser (all or part of it). Appraisals are also useful for properly documenting the purchase and sale transaction because they will include a list of assets at the practice in a Schedule; this list comes in handy because the parties will agree that these assets are included in the transaction. The appraisal is typically paid for by the Vendor. Nowadays, appraisals are not prepared for the purposes of selling a dental practice, but for some other reason – such as for personal reasons or internal financing purposes. This allows the Vendor and the appraiser to limit their liability when it comes to the purchaser relying upon the appraisal without doing proper due diligence.
In the next series of blogs, I’m going to talk about how how dental practices are valued. I’ll talk about some of the valuation methods (the good, the bad, the ugly) and considerations.
Fair Market Value
Fair Market Value is a concept. And the concept goes something like this: a dental practice is worth whatever a willing buyer and seller agree upon, in light of prevailing market and economic conditions, after being adequately informed and the absence of factors which would otherwise make the parties act involuntarily (e.g. duress, undue influence, fraud, etc.). So if anyone ever asks what is my practice worth, that’s my starting point.
Rules of Thumb
I don’t like rules of thumb. The reason: they’re flawed.
Case in point, many dentists believe that the Fair Market Value for their practice is what comparable practices in the same geographic location recently sold for. But no two practices are alike. And the comparable approach doesn’t take into account the prevailing market and economic conditions. Also, two practices that are similar in size and characteristics may generate different revenues and have different cash flows (some practices are more efficient than others).
Another rule of thumb that dentists believe is that the Fair Market Value for their practice is equal to 100% of the practice’s most recent year’s gross revenues (from dentistry, hygiene and lab). But this doesn’t take into account the general marketplace: when times are tough all around, there is a lack of competition, not too many dentists, a high proportion of patients to dentists, and available financing, it’s likely a buyer’s marketplace. This means that practices generally do not sell for last year’s gross revenues because buyers wield more power and can start up their own practice instead of purchasing a retiring dentist’s practice. This is particularly true in Northern Ontario. The opposite results in a seller’s marketplace: too many dentists, not to many practices for sale, not enough patients to go around, etc. This leads to practices selling for closer to last year’s gross revenues (or even beyond it in the major cities). So relying on the 100% of last year’s gross revenues is flawed.
In the next blog, I’ll discuss the discounted future cash flow approach to valuing a dental practice (which has become and in my opinion is, the better way to value a dental practice).