How to value a dental practice amid a dispute

When a dental practice valuation is being prepared to resolve a dispute, there is more involved than a valuation for a dental practice sale. When a challenge occurs over the value of the practice, such as an amount for distribution in a divorce, to be effective, this type of valuation should be as descriptive as possible.

Support from experts, as well as from articles written on the subject, will assist the evaluator in prevailing against one who is not as well prepared. In persuading a court or mediator that the valuation is authentic in its documentation, there should be recognition of adversarial points of view. Those counter-assessments can help strengthen the dentist's position.

With most dental practice valuations prepared a practice transition, the support data comes from the dentist or the dentist's certified public accountant (CPA). These items include tax returns, financial statements, and other information readily available from the dentist. There is no need for outside support since everything should be already prepared and available.

Valuation preparation costs for a practice sale vs. a dispute

When a dental practice valuation is being prepared to provide information to potential buyers, little to no outside support is needed. Nearly all the documentation should be available to the dentist or to his or her associates, such as the CPA.

Many practice brokers offer these services and when provided with the information, they can prepare a valuation quickly and for less than $5,000. Sometimes, the practice broker negotiates a reduction in their commission by the valuation's cost. These offsets occur when the sale price is within the broker's expected estimate that the dentist and broker agreed on.

Preparing a valuation to resolve a dispute involves much more time and effort.

To explain why, let's examine the information needed to prepare a valuation for a sale. As previously explained, almost all the information needed for this valuation comes directly from the dentist or his or her CPA. Anything the CPA does not have is almost always available from the dentist, dental office manager, or a trusted employee.

Required data for a dispute-related valuation

The starting point in preparing this type of dental practice valuation is the same as if the practice were being sold. After gathering all the data needed, each point of contention, as well as the information that was forwarded by the dentist, should be confirmed and supported.

The data from the dentist should be compared to similar geographic dental practice averages and adjusted so there are no material differences between the practice being valued and practices in the same geographic area. After the dentist's information is confirmed and analyzed with support from expert sources, the actual valuation can begin. Gathering the research and using it for the valuation effectively creates the need for another valuation.

As mentioned, this may cause the dentist's data to be modified so it is comparable to actual sales of dental practices. This process is not unusual for an evaluator who has experience with disputes. The term for this process is called the "normalization process." The essence of it is to ensure there are no unusual items in the valuation that skew it to be materially higher or lower in value than it would normally be.

Valuation turnaround time

Most qualified dental practice evaluators require at least a two-week time frame to prepare a dental practice valuation for a sale. When a valuation is to settle a dispute, it normally requires the same two-week period plus another week (at least) so the research and citations of support to the valuation are acceptable to a mediator or to a court.

Finding similar practices with no material differences in gross revenue, goodwill percentages compared to gross revenue, and practices in the same geographic area go a long way toward convincing the final decision-maker about the outcome of distribution from the dental practice that would go to each spouse. For dentists in equitable distribution states, it is even more important to have a valuation prepared and include an analysis of goodwill. The mediator and court need assistance in determining the value of the dental practice since as attorneys, neither has much experience working with dentists or dental practices.

The analysis of goodwill, especially in equitable distribution states, should allocate personal goodwill compared to dental practice goodwill, commonly known as enterprise goodwill. Since personal goodwill is not a marital asset in most equitable distribution states, those attributes allocated to personal goodwill are critical to the dentist and his or her future financial well-being.

Bruce Bryen is a certified public accountant with over 45 years of experience. He specializes in providing litigation support services to dentists, with valuation and expert witness testimony in matrimonial and partnership dispute cases. Bryen assists dentists with financial decisions about their practice, practice sales, evaluating whether to join a dental service organization, practice evaluation during divorce proceedings, and questions about the future or financial health of dental practices. He can be reached at [email protected].

The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.