The Dental Shopper Blog

Appraisal Considerations

Thursday, February 19, 2009

I wanted to thank Dr. McLerran, a practice transition specialist in Texas, for providing us with this valuable information. This is a question that many of you have asked me in the past. Lon

Dr. Johnson appeared somewhat flustered when he arrived at our office to discuss his transition. He is an old friend and colleague who had hired a young associate to be groomed as his eventual successor. Their relationship was good and the associate was ready to affect the purchase. Before pulling the trigger on the purchase, the associate had requested a second appraisal from another company to verify our appraisal. Dr. Johnson had received the second appraisal and was bewildered. He had received a large folder full of financial printouts with a summary page that stated the appraised value of the practice. He could not make heads or tails of the printouts and wanted us to look it over.

Upon our review, we found that the appraised value was right in line and the printouts were all accepted approaches to value, albeit without any explanation.

Dr. Johnson shook his head and said that, for the money he spent, he expected to be able to understand the appraisal.

Dr. Johnson is not alone. Many doctors have a difficult time understanding dental practice appraisals. So, what are the elements to an appraisal of a dental practice and what should you expect for your money?

There are a number of types of appraisals used for different situations. A limited, letter, or summary appraisal might be used when you just need to know the value. This may come into play in estate planning or to verify the value of your assets. This kind of appraisal will only state the basic assumptions and give you a value.

A fully documented appraisal will be needed in most circumstances. These include a practice sale, divorce, partnership buy-sell agreement, and partnership purchase. Be assured that all parties in the transition will have their advisers; attorneys, accountants, lenders and consultants. These advisers will want to be able to understand how the value of the practice was derived and the rationale of the appraiser.

Therefore, the appraiser should provide some basic, commonly accepted information. The appraisal should state the subject and date of the valuation. It should define the standard of value-fair market value, fair value, or investment value, and it should define the scope of the valuation- for divorce, purchase, or a buy-sell arrangement.

In addition, the appraisal should discuss the general economic situation at the time of the appraisal and discuss the state of the dental industry in the area of the practice. There should also be an in depth discussion of the practice itself.

Then, there should be a discussion of the financial statements and condition of the practice with adjustments of income and expenses to arrive at a true operating net income of the practice.

After the financial analysis, the appraiser should discuss the various approaches to value and how they are weighted in the appraisal.

The Practice Valuation Study Group, which is a national organization of dental practice consultants/appraisers, recommends three approaches to value; an asset approach, a market value approach, and an income approach. Although the result of each approach might be averaged to obtain an appraised value, the appraiser must use his/her judgment in how to weight these values. For example, a practice may have tremendous net income but is full of old equipment and is located in an undesirable area. In that case, the income approach may give us a result that is not justified by market conditions.

And, finally there should be a list of qualifications of the appraiser. In reality, all appraisals are opinions of value based upon a comparison of the subject practice with like practices which have sold in the marketplace. Therefore, it is a great advantage to employ an appraiser who is familiar with dental practice sales.

Keep these points in mind so, when the time comes, you can seek an appraisal that you can understand and one that fits your needs.

Paul E. McLerran, D.D.S., CCIM
(888) 656-0290

Please Note: Items on this blog are not necessarily the opinion of The Dental Shopper or its staff. These items may be controversial and are here for the purpose of free discussion of ideas and concepts.
Dr. Lon Uso, owner.

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