You’ve worked hard to build up your dental practice. When it comes time to dissolve the partnership, sell your practice, or welcome a new partner into your practice, valuation becomes especially important. You need a law firm with a thorough understanding of the dental industry and dental practice valuations to help you through the sales process.
Discuss Your Dental Practice Valuation with an Experienced Attorney
If you’re considering purchasing or selling a dental practice, Mahan Dental Law will help you determine the fair market value of the dental practice. We can also help you orchestrate the sales process. Our attorneys have vast experience with the dental practice marketplace. We use our unique experience to represent clients in the complex dental practice valuation and transitions. Contact Mahan Dental Law today to learn more.
How Are Dental Practices Valued?
When a dental associate is attempting to purchase an existing dental practice or a dental practice owner is looking to expand, the prospective buyer needs to evaluate the purchase price properly. One of the best ways to value a dental practice is to work with business valuation professionals. There are three different dental valuation approaches: the income approach, the asset approach, and the market approach.
The Income Approach
The income approach is the most commonly used way to value dental practices. The income approach determines the value of a dental practice based on its future ability to generate an income stream in the future. The income model also considers the application of a risk factor to the income stream. This approach is also the most appropriate approach when assessing the potential value of a dental practice. Using historical information and evaluating the dental practice’s past income can help buyers during the vetting process.
The Asset Approach
With the asset approach, the valuer considers the individual value of all of the tangible and intangible assets of the dental practice less any financial liabilities. The opposite approach can be challenging, especially because significant intangible assets often make up a large portion of the value of a dental practice. For example, location, patient list, the practice name, and the workforce that’s already in place are more difficult to value than tangible assets, such as dental equipment.
The Market Approach
With the market approach, the valuation is based on current market transactions for similar dental practices. This is the approach that most real estate agents use when determining a selling price for the property. Realtors will consider how much other similar properties have sold in recent months. The market approach isn’t always the ideal approach to use when valuing a dental practice. There may be comparable sales to reference because dental practices turnover frequently.
However, determining whether other transactions are similar enough always entails a degree of uncertainty. Using the market approach can be helpful after using another approach to value a dental practice. Suppose the income approach shows that the dental practice is valued $100,000 less than what similar dental practices have been selling for, the market approach can be a sanity check.
Valuing a Dental Practice for Divorce
Valuing a dental practice becomes necessary when the owner or partner of a dental practice gets divorced. In a divorce, the marital assets and debts will be divided between the two spouses. If you or your spouse own a dental practice, the dental practice will be considered when a court divides your assets. The purpose of a valuation is to determine the financial value of your dental practice. Before a dental practice can be split during a divorce, it needs to be properly valued.
Any future earnings the dental practice makes after the divorce won’t be divided between the spouses. The value of the dental practice is measured by the asset’s market value or the money that a buyer would currently pay to purchase the dental practice. Spouses can’t agree on how to divide their assets in debt outside of the court. For example, one spouse may agree to take the family home and the other spouse may agree to keep the dental practice.
In other cases, the spouses agree to sell the dental practice and divide the proceeds among themselves. When spouses cannot agree on how to divide the dental practice, the court overseeing the divorce will need to step in. The court will usually hear evidence from professional business valuators and both sides can present evidence supporting their case.
Financing and Dental Practice Valuation
The ability to finance the purchase of the dental practice should also be considered when determining value. Suppose the buyer and seller agree on a purchase price that appears reasonable, but the seller can’t reasonably be expected to obtain financing at reasonable terms. In that case, the purchase price may be too high. The buyer should aim to have enough cash flow for the practice to pay off the acquisition within five years.
National financing companies and banks have understood the overall stability and value of the dental industry. As a result, they are often willing to offer buyers more favorable loan terms. Seller financing may be a viable option in some transactions.
Tax Considerations When Purchasing a Dental Practice
Most dental practice purchases are structured as asset acquisitions instead of stock acquisitions. The buyers usually don’t want to be saddled with potential legal liability associated with the previous owner of the dental practice. The purchase agreement should clearly define how the dental practice assets should be allocated and in what amounts, relative to the sales price.
The buyer may deduct the entire cost in the year of acquisition for certain assets. This can be true even if all or part of the purchase price has been financed. Using this strategy can help the buyer’s overall cash flow in the early stages of the dental practice acquisition. The new owner may deduct equipment, furniture, and supply costs. Assets such as non-compete covenants, goodwill, and patient records are subject to amortization over 15 years.
Contact a Dental Practice Valuation Attorney Today
Buying or selling a dental practice can be a complicated process. One of the first steps in selling a dental practice is to carefully assess the valuation and the tax implications of a potential sale. Working with an experienced dental practice attorney can help you protect yourself and ensure that the dental practice has been appropriately valued before you sign the sale agreement. Contact Mahan Dental Law today to schedule your initial consultation and learn more about our services.