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Earl M. Douglas, DDS, MBA

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James J Howard, DMD

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Joseph Jordan, JD

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The Value of a Practice Appraisal

by Earl M. Douglas, DDS, MBA, BVAL | Earl Douglas on Google Plus

As I consider the topic of the value of a dental practice appraisal, I think of all of the instances in my twenty four year's experience of why people have had their practices appraised and what good it has actually done for them.

The first element to consider when appraising a practice is the purpose of the appraisal. The primary reason for most appraisals I prepare is to set a price for sale purposes. Judging from the results of actual sales, these valuations are accurate and workable, as the great majority of practices sell at the appraised price and the purchasers are invariably successful. One note of caution here is that practice values are invariably for a 100% undivided interest and no inference can be drawn for the value of partial interests. In other words, if a practice is appraised at $600,000, one cannot deduce that a 50% share is worth $300,000, since there is a discounting process that must be factored. A minority discount due to lack of control and a lack of marketability must be applied when an interest lacks control, which a is the case in a 50% or less interest.

The second reason I see for practice appraisals, and I hope you don't fall into this category, is for division of property in divorce. Since there is usually an adversarial atmosphere to divorce appraisals, the results produced by both sides are usually rather far apart. Many times experts are engaged who have never conducted a dental practice appraisal and have no knowledge of the dental market. The chief economist for a college, while intellectually superior, may have absolutely no working knowledge of the practice marketplace and end up applying formulas that result in outrageously high or low values. Too many times, this approach to partisan valuation only results in high litigation costs before the court finally arrives at a reasonable and realistic value. When approached by an attorney for divorce appraisal work, I tell them that they will get the same result whether he or she retains me as if the opposing counsel had retained me. It is critical to retain independence in the appraisal process, particularly in this area.

A third reason for an appraisal is in cases where a practice is being displaced by a governmental agency, known as imminent domain. When your building is being torn down to make room for a MARTA station as was the case some years ago, or to make room for a new high-rise, as is currently happening in Atlanta, values must be established for the loss of value as a result of displacement.

Another appraisal purpose is that of financial planning. For this purpose, the appraisal must provide much more information than just the price. While the price is important, the project must also develop further information such as estimated time to a sale, how to minimize taxes, and the practice's capacity for the seller to work in the practice part-time after the sale, to name a few. A number of dentists have come into my office and said, 'I just don't know what I'm going to do!' My typical reply is, 'I know what you're going to do, you're going to sell your practice. The real question is how and when.' For larger practices, having the data to make this decision as precisely as possible will have significant impact in the overall planning outcome.

One growing segment of appraisal demand is that of determining practice value and knowledge of all financial aspects of the practice for informational and preparedness purposes. Lately, a number of dentists have commissioned appraisals as a form of life insurance for their practices. They have seen colleagues unexpectedly pass away and watch these practices dwindle in value until they are eventually sold for pennies on the dollar, if they are sold at all. These clients seek our services for several reasons. First, they know when a seller unexpectedly dies, the surviving spouse never knows what to look for, where to look, or who to call. They realize that this burden places tremendous stress on a survivor, who is stressed enough from the loss of a spouse.

These clients realize that, even though the process of gathering everything needed for an appraisal and sale is a tedious process, it is infinitely easier for them to accomplish than for a survivor who doesn't know where to start.

When I have everything in hand that I need to appraise and sell a practice and can put a substitute dentist in place in the event of a death or disability, I generally can sell the practice at its fair market value and do so quickly and in a cash sale. When it takes months to gather the information, there are generally large discounts in what a practice will sell for, if it can be sold at all.

Another side benefit of this appraisal is that owners learn a great deal about the financial management of their practice. In performing a practice appraisal we learn a great deal about the strengths and weaknesses of a practice. In one case, we even showed a dentist that his landlord had a lien on his practice, which the dentist was not aware of. In another case, a dentist had the preparation appraisal performed and six months later, he suddenly died in a work out session. Knowing the practice, having a current appraisal, and having everything in hand to market the practice greatly expedited the process. I knew of several interested parties, called them, and within fifteen days, the practice sold for 95% of the appraised value, in cash.

All things considered, it would be the rare practice owner who would not benefit from having an appraisal of his or her practice. The information gained can have instant value, as in the case of a death, or ongoing value, as in the case of financial planning. One caveat for dentists is that a qualified appraiser should be chosen for any appraisal assignment. Just having been in the business for a number of years is not a sufficient qualification. While a qualified appraiser will have experience and knowledge of the dental practice market, they also must have education, training and experience in the appraisal field, and should be a member of a professional appraisal organization.

Every dentist should have a current appraisal for his or her practice. It's just very cheap insurance and an invaluable management resource.