Dental Strategies For Success library

Understanding Your Practice Appraisal

by Earl Douglas | 07/06/2009 | Financing & Financial Planning , Dental

There are three formal approaches to practice value — the Market Approach, the Asset Approach and the Income Approach — and each must be considered before conducting a practice appraisal. Within each approach are various methodologies that are applied, and it is the appraiser’s experience, judgment and examination of the subject practice that determines which approaches and methodologies to use and which to discard in establishing practice value.

 
• The Asset Approach determines practice price by assessing the cumulative value of the practice’s tangible and intangible assets. This approach considers the value of all of the practice assets — equipment, supplies, instruments, office and lab equipment, and most particularly the intangible assets, which include goodwill.
   
• The Income Approach determines price by calculating how much a buyer can afford to pay for a practice, given the practice revenues, expenses, debt service, and a commensurate purchaser income. Methodologies used in this approach include the Capitalization of Earnings Method and the Amortization of Earnings Method.
   
• The Market Approach determines the value of a practice by comparing the practice to similar practices that have actually sold and applying the price/gross ratio of those practice sales to the subject practice. The most important comparative qualities for practices are demand for the location, attractiveness of the office and the fee-for-service component. The successful application of this approach depends on having a sufficiently large database of transactional data and the experience to identify true comparables.

Since buyers rarely pay more than the market bears or more than they can afford for a practice, the final result for most practice valuations is the lower of the Market Approach or the Income Approach. The Asset Approach is rarely used for an ongoing practice, being usually applied to an inactive practice or a brand new practice that does not yet earn a profit.

Some appraisers will average the results of several approaches and methods, which is like mixing silicon and alginate impression materials together to get a better impression. In the case of appraisals, there is usually one method that gets to the heart of value much better than others, and its contribution should not be diluted for the sake of trying to use all the results of differing approaches.

The current economic times present an especially challenging task for the appraiser, since value must depend on predicted future earnings and not on past performance. It is extremely important to understand a practice to the depths of its foundation in order to predict how the current recession will impact expected revenues in an individual practice. This is a daunting task, given that none of us has a crystal ball to know just what the future holds and when any event will occur.

A professional and accurate appraisal is the result of much study, judgment, experience and deliberation, which not only provides a final price, but is able to prove why that price is the only logical result.

_{Statements of opinion not necessarily endorsed by ADA Member Advantage, ADA Business Enterprises, Inc., or the American Dental Association, or any of its subsidiaries, counsels, commissions, or agencies.}

Earl Douglas, DDS, MBA, BVAL, is the president of ADS South, which provides dental practice transition services in the Southeast, and the founder of ADS, a national organization of dental practice appraisers, brokers, and consultants. Dr. Douglas has earned the designation of Business Valuator Accredited in Litigation, and has been admitted as an expert witness and testified regarding practice valuations throughout the Southeast. Dr. Douglas can be contacted at 770-664-1982 or douglas@adssouth.com.