Appraisals (valuations)
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Multiple Methods Capture Multiple Aspects Of Your Practice’s Value
Potential practice sellers frequently ask us: ”On average, or in general, what are dental practices worth when compared to their annual collections? We can give them a simple answer based on our standard deviation analysis of databases that contain information on practice sales and practice appraisal results. We can tell them that in recent years, when practices sell to other dentists, the average practice sale occurred at 76.4% of the practices’ collections in the most recent complete calendar year. But, we have to point out that the average price to collections percentage can’t be applied to any specific practice. This is evidenced by the fact that, in recent years, 68% of practices sold within a range from approximately 64.6% to approximately 88.2% of their annual collections. 32% of the sales occurred at even higher or lower percentages of collections. For sales do DSOs (corporations), the prices are higher, but the variances exist in the same manner. Our study of a recent group of sales to DSOs showed that the average sale price was at 103.2% of collections, but 68% of the sales fell in a range from 76.7% to 129.7% of collections. You can see that practice values and sale prices vary significantly relative to their annual collections. For each individual practice there are specific characteristics and attributes that push its value up and down within these ranges of variance. When asked what practices are worth, any attempt at a simplified answer is no more than a rule of thumb. When establishing an asking price, from a seller’s perspective, the use of a rule of thumb leaves open the risk that the seller’s practice is undervalued and that the seller does not receive full fair market value from his/her sale. From the buyer’s perspective, the risk is that a rule of thumb over-values any one specific practice. Buyers and their advisors typically put no faith in asking prices that are based on no more than rules of thumb. Without a comprehensive appraisal there is nothing to serve as logical support for the asking price during negotiations because the true value of the specific practice is not documented. No Single Appraisal Methodology Is Adequate No single appraisal method captures all aspects of a specific practice’s value. The use of only one appraisal method risks that some major factor affecting a practice’s value is not given adequate consideration. Multiple appraisal methods are necessary. From the results of several different appraisal methods, the experienced practice appraiser must then determine the practice’s final value, giving consideration to the weight that should be given to each method’s result. The appraisal methods that we use for any one specific practice may need to vary, based on the characteristics of the specific practice and the range of practice data and information that is available to us. But, in most cases, given adequate data, to give appropriate consideration to multiple components of a practice’s value we will use at least 2 of the following appraisal methods, and most often all 3 of these methods: 1. Single Period Capitalization of Earnings. After a practice’s expenses are adjusted to convert from taxable income to pre-tax cashflow (earnings before interest expense, taxes, depreciation deductions, and amortization deductions –or-- EBITDA) a capitalization rate, derived from analysis of practice sale market data, is used to determine the value of the practice based on the total of all dentists’ potential pre-tax cashflow earnings derivable from the practice. 2. Purchase Debt Serviceable By Excess Income. Elective expenses on the practice’s tax return are removed from consideration. Non-cash expenses (depreciation and amortization) are removed from consideration. Then the practice’s expenses are analyzed to determine how they may differ for a practice buyer. Once these steps are completed, we have a view of the maximum pre-tax cashflow that would be available to a buyer of the practice. From that we subtract a reasonable level of salary or profit for the buyer, one that is appropriate given the amount of dental production that the buyer will have to do to sustain the practice at its current level of collections. After this subtraction, the remaining income is deemed to be excess income, and is available to the buyer to make purchase loan payments for the purchase of the practice. Using current interest rates and repayment terms available from banks, we calculate the price that could be paid for the practice that would result in annual purchase loan payments equal to the excess income available to make those payments. This process produces a value for the practice that, if paid as a purchase price, results in a buyer being able to make the purchase loan payments on the practice and still have a personal income at a level that is commensurate with the amount of dental production the buyer must do to sustain the practice. 3. Market Transactional Data. Using analysis of practice sale market data, a potential price or value range is determined for the practice, relative to its level of annual collections. Then, a study of the practice’s characteristics, attributes, location, equipment, and other factors is used to determine where the specific practice’s value falls within that range. Sources Of Practice Sale Data In regard to the appraisal processes above, we derive our practice sale market data from the following two sources. 1. Goodwill Registry. In addition to being a source of information on transactions in other healthcare fields, it provides a dental practice sale and valuation result database maintained by and available from The Health Care Group, Inc., 140 West Germantown Pike, Suite 200, Plymouth Meeting, PA 19462-1421. It contains sale and valuation related data on a large number of dental practice sales and valuation reports that are useful in establishing the fair market value of a specific practice. Information in the Goodwill Registry database related to dentistry has been collected from dentists, CPAs, practice brokers, and other sources over a period of many years. It reports certain basic financial data for each dental practice reported along with the sales price or valuation results organized by dental practice specialty and general dentistry. The date of the sale, purpose of valuation or sale, region of the Country, collections, sale price, overhead percentages, earnings (pre-tax cashflow income), who the buyer was (e.g. individual dentist or DSO / corporate dentistry), component of goodwill value, and other distinguishing characteristics are reported for each entry. Data maintained in the Goodwill Registry typically dates back 10 years. Given that the practice sale market changes over time, we typical limit our analysis to sales or practice valuation results that occurred in the most recent 3-5 years. 2. George D. Stollings and Associates, Inc.’s Proprietary Practice Sale & Valuation Database. Within our office we have maintained records on the dental practice sales of our practice brokerage clients in the most recent years. In almost all cases, our records for each sale include an array of valuable information such as the sale price, the practice’s annual collections, the practices taxable income, copies of tax returns, and information on the style of practice, location of the practice, etc. Data from the above 2 sources is compiled and statistically analyzed by George D. Stollings and Associates, Inc. * The term “Appraisal” is commonly used to describe the process by which a practice’s value is determined. We commonly use this term because our selling clients are familiar with this term. However, the term “Valuation” is more correct. |
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