Got an email last week from a dental friend who is trying to sell a couple of practices and wanted to know where he should go to get an appraisal. I guess the big question is: Do you really need an appraisal? The answer is sometimes, but not very often. So, let’s take a few minutes and figure out what that answer means because it depends on the practice, the reason, and timing issues.
What actually is an appraisal? Most dentists assume that it is a black and white document that tells them exactly what they can sell their practice for. This couldn’t be further from the truth. The dictionary uses these synonyms: Assessment, evaluation, estimation, judgment, rating, gauging, sizing up, summing-up, and consideration. Each and every one of these descriptive words for an “appraisal” makes it very clear that it is not the exact value of the item being sold, but the personal estimate of the person doing the appraisal. There will never be two appraisers that arrive at the same value. Also keep in mind that the appraiser is being paid by you. They want you to be happy with the value they come up with. They tend to factor up for the seller and/or down for the buyer, depending on who is paying the bill.
Every appraisal begins with a page or two of disclaimers. Basically, they are telling you that they don’t know if the facts they base the documents on are correct, that they bear no liability if anything is wrong, and, if you read the small print, they tell you that what follows doesn’t mean anything when it comes down to the actual finished transaction. Basically, it is a lot of blah, blah, blah and then this statement from the IRS:
According to IRS Rev. Rule 59-60, 1959-1 C.B. 237, the fair market value is defined as the price at which a property would change between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, with both parties having reasonable knowledge of the relevant facts. The fair market value of every professional practice is affected by various financial, economic, and geographic considerations. Ultimately, the fair market value will be determined by the marketplace and is subject to the forces of supply and demand.
Now the truth comes out. Similar to a listing broker for a residential real estate sale, you are often times led to believe that your home is worth more than you thought and all you have to do is sign this exclusive listing and all your worries are over. Reality hits when the actual sales price turns out to be about what you originally thought you would get before the slick sales pitch from your real estate agent. Once again, this is a buyer beware area where reputations and track records are important.
Back to our original question: Do I need an appraisal? Certainly, a starting point to begin the search for a buyer demands that you have a price in mind. Just keep in mind that a bank will not even look at an outside appraisal before they lend money to a buyer. They demand a “bank package” consisting of tax returns, Profit and Loss Statements, Equipment Lists, etc., from both the seller and buyer and then they run the numbers based upon their own data on whether or not the numbers will work for the purchaser, even if they fall short of the previous owners track record of production and overhead. Banks know better than to trust their future loans to someone other than their internal financial teams. Many deals arrived at by the buyer and seller fall apart with a no go from the bank.
When do you actually need an outside appraisal? If you have no idea of what you want to sell the practice for, go for it. It should cost from about $2,500 to about $4,500. The appraiser will look at your assets, resent sales, financial statements for the last three years, demographic growth in the area, and current condition of the practice in the marketplace. You now have a starting place. Do you think the buyer will just accept that appraisal? I have never seen that happen. They should and will do their own due diligence and come up with their own number. I guess the nice thing is that 99% of dentists buying a practice are also clueless about value.
If you were a spouse seeking help to sell a practice upon the untimely death of your husband or wife this would be done by your broker. In cases like this, time is of the essence. It needs to happen quickly.
If your practice has been on the market for more than 6 months, then your original price or the advice you are receiving is off base. It could be that you have failed to keep up with technology, new patients, and staffing. You might live where very few dentists would ever want to live. This drives the price down dramatically. Let’s say you are in the worst part of town. This is going to hurt you. Finally, it could be the broker you are using if you are using one. They may not have the depth of knowledge or contacts to find a potential buyer. At their 6%-10% commission rate, I would expect them to be spending money to find that buyer.
If you are selling to a large group practice, national corporation, or DSO, you certainly can negotiate the price. But they normally will be pretty close on their first offer. They either want the practice or they are in a hurry to move on.
If you have kept up with the business side of your practice you can assume that your practice is probably worth roughly 75% (or maybe a little more) of the last 12 months collections or about 1.5 to 2 times the net for that same period. That might be a starting point. Value would increase if you: have overhead of less than 60%, have a newer finish-out and up to date equipment, maintain an 80% recall average, have at least 40-70 (or more) new patients per month per doctor, and you are located in a desirable area (where people want to live).
Appraisals are great but the person you use and the timing are always important. Timing would include the current economy, banking, interest rates, competition in your area, other available practices, and time of the year. Bottom line: You have to come up with a number and it has to reflect what the market will bear and what a buyer is willing pay.
Michael Abernathy, DDS
PS. If you’re contemplating an appraisal, then you are likely planning on some sort of transition in your practice. If so, you should consider purchasing this book: THE ROADMAP TO WEALTH & SECURITY (Your Complete Guide to Dental Transitions). Just follow this link and scroll down the page to locate. Thanks!