Gary A. Sherman, CPA
July 6, 2016
Ah, summer. It’s that magical time when many dentists dream about spending more time on the golf course and less time in the office. Or maybe you can already smell the salt air and feel the ocean breeze on your face as you envision sailing around the world.
If you own your own practice and are thinking about retirement, we recommend taking certain steps today to turn today’s daydreams into tomorrow’s reality.
The most important step: obtain an accurate valuation of your dental practice. This will give you an independent, ballpark figure of what the practice is worth and how soon you might be able to declare your Independence Day. This doesn’t mean of course that a buyer will pay the exact price of the valuation. But it will give you a good idea of fair market value, similar to determining the asking price for the sale of your house.
Why Your Practice Needs a Regular Valuation Checkup
Even if you are not ready to retire, there are other reasons to know what your practice is worth. Consider these examples:
- Divorce proceedings
- Estate taxes, gift taxes, and family limited partnerships
- Employee stock ownership programs
- Partnership disputes
- Business damages and intellectual property infringement;
- Buy/sell agreements and key-man life insurance
- Financial reporting for purchase price allocation and goodwill impairment testing;
- Bankruptcy determinations and eminent domain proceedings.
Avoid ‘Rules of Thumb’
Many self-proclaimed “experts” will offer no-cost “ballpark” valuation estimates as part of a sales pitch. Typically these estimates are based on rules of thumb, such as the past performance of a dental practice. It’s like trying to drive a car with only a rear-view mirror.
Our State-of-the-Art Approach
We recommend having a qualified professional perform a business valuation, one that understands the best methods to be used with each unique valuation and the additional factors involved in the buying and selling transaction process.
We value your practice using the same methodology used by hedge funds, venture capitalists, and famed billionaire investor Warren Buffet. First we start with a four-part quantitative analysis. We look at average earnings over the last three to five years and then calculate potential future cash flows. We also look at comparable sales and calculate a value for goodwill. From there, we take into account qualitative factors, such as location, equipment, current staff, patient base, local competition, and macro trends in practice revenue.
Anyone with a calculator and a basic knowledge of accounting can look at financial records and tax returns and come up with a value for a business. However, that figure will only tell part of the story.
To get the whole story—and, consequently, the most accurate valuation—you need a CPA who understands the risks and nuances associated with dental practices. Moreover, a CPA who specializes in dental practice accounting can offer additional assistance beyond the actual valuation, including structuring a transaction in the most advantageous format, obtaining financing, and minimizing tax exposure.
Call me for help with this and any other issues you wrestle with in managing your Dental Practice.