Selling a Practice
It all starts with a Valuation
If your practice has a value of over $150,000, most banks and financial institutions want some assurance that a qualified appraiser has valued the practice as a basis of lending funds to the purchaser (generally speaking 100% financing) to enable the purchaser to buy your practice. Generally the Vendor does not want to be "a bank" and lend the funds to the purchaser, because funds are available to qualified purchasers.
Our comprehensive valuation is also the focus of the value; some even consider our valuation to be a self fulfilling prophecy. Our objective is to find a Fair Market Value for both The Seller and The Buyer.
A comprehensive valuation should include a detailed list of assets in the practice, as it is these assets, that are sold. It also includes documentation on how the practice is run. The value is represented in four areas 1) Equipment - supported by a list in detail with age and individual values. 2) Residual value of Leasehold Improvements. 3) Supplies - a general assigned value for supplies which will change on a daily basis but within non-material limits. 4) Goodwill - the intangible value assigned, which generally relates to the client base, location and future potential of the practice. An independent chart audit is critical in determining the value of the Goodwill of your practice. PPS has a proprietary system for auditing the patient charts and determining the activity level.
If the value of the practice is under $250,000 a simpler and less expensive Letter of Opinion may suffice. With a smaller loan at risk, the financial institutions require less documentation to support the loan. We would not recommend a comprehensive valuation if we thought a Letter of Opinion would be sufficient in order to sell and obtain financing for a practice.
Equipment should be valued as part of an ongoing practice and not as equipment for sale which is sitting on a warehouse floor or at an auction. The equipment should be listed in detail with itemized serial numbers and the date when it was first put into service, where possible.
The Undepreciated Capital Cost (UCC) of equipment is the value which most financial statements will show as the book value of equipment but Capital Cost Allowance (CCA) uses 20% declining value to allocate the cost of the consumption of the equipment over the useful life of the asset. This calculation writes off approximately 80% of the value of the asset in about 7 years, yet the equipment will often times have a useful life of 20 years. As a result the book value of the asset is generally understated compared to its true value.
Exceptions to the above would be assets which do not have a twenty year life expectancy such as computers which have a life expectancy of approximately 5 years. Computers have also been dropping in cost and to reflect this, the CCA rate is a 30% declining balance.
The expectation of value for assets should relate to condition, age, technological obsolescence, universality of use by most Dentists. Turnkey practices have reasonable equipment which should be expected to be available in most practices. Excessive value of equipment may limit the availability of goodwill especially if the billings relating to the equipment are limited. Seldom is it beneficial to replace older equipment just prior to selling your practice. The best you can expect is to recoup your cost and even that may be optimistic. Our advice would be to review your practice's equipment 5 to 8 years prior to when you expect to sell your practice and to do any replacing at that time.
Leasehold Improvements (L/I) are expensive and restrict many dentists from moving the location of their practices. Sometimes L/I are changed entirely but most of the time there are Band-Aid changes made as the component parts wear out.
Typically most practices will spend over $100 per square foot for original installation of L/I. There is a base of $25 per square foot, which they do not go below if the facility would be acceptable to the purchaser, without changes. This accounts for the wiring, plumbing, and lead lining in the walls. With reasonable repair and maintenance, both mechanical and cosmetic, the L/I typically tend to stabilize in value as the consumption and replacement are similar.
What can go wrong?
- The landlord no longer wishes to renew the lease. The L/I value disappears at the end of the current lease and options. Security of possession is important to the purchaser thus to the value of the L/I.
- The community changes ethnically. As cities grow, pockets within the city change and the patients who were comfortable seeing the current dentist, move away and the new neighbors are looking for a different ethnic practitioner. This causes practices to have lower billings and thus reduces the value of the practice.
- Design of offices changes over time. The current concept of having the reception project into the patient waiting room is positive in valuing a practice. The sliding window is not a contemporary design.
- Fire/water damage. This should be covered by cost replacement insurance which should be reviewed every couple of years.
This is the most important "asset" of the practice - GOODWILL. It is the value that relates to the clients of the practice as well as intangibles, such as location, billings per patient, new patient count and many other intangibles within the practice. The other assets of the practice are easy to ascribe value to. The trick is to understand the value of goodwill and how it is impacted by other variables. Practices that have too high a value in hard assets may not have enough overall value to achieve what the goodwill is really worth. There is a limit to the total value of the practice, based on its ability to create excess income. Therefore, in gross measure, Goodwill relates to the balance between Assets, Excess Income and Patient base.
It makes sense to surround yourself with experts. You will ideally have an accountant and a lawyer who routinely deal with Dentists and the buying and selling of practices. Your accountant should be brought into the picture early to advise you on the tax implications of selling your practice. The net value of your practice is based on the net after tax position of the sale, not the gross value achieved. PPS works with many qualified and experienced lawyers and accountants that we can refer you to.
Supplies are a combination of actual supplies which are in use within the practice, but also are a catch all for hard assets outside of the standard Equipment and Leasehold Improvement category. This would include small hand instruments not listed under equipment. The level of supplies changes on a daily basis, but the essence is, that the overall value does not change materially and the value assigned is to represent the value of the "Supplies". The variance in value of supplies in a dental practice is not material in the overall value of the practice.