For many dentists, a practice is more than a workplace: It is a lifetime investment, a professional identity, and a cornerstone of long-term financial security. Because of this, the valuation of a dental practice becomes a pivotal element in many major life and business events, including transitions, divorce proceedings, partnership disputes, estate planning, and buy-sell negotiations. Yet despite its importance, the process of selecting and working with a valuation expert is often misunderstood or underestimated.
Michael Lehner, CPA, ABV.
A successful valuation begins with choosing the right business valuation expert. Dental practices differ dramatically from general businesses, especially in the way goodwill is measured.
Goodwill often comprises an unusually high percentage of total value in dentistry, making it essential to work with someone who understands the profession from the inside out. Dentists should speak with several valuation experts, review credentials carefully, and ensure the expert has substantial experience in dental-specific valuations.
Just as crucial is the expert's readiness to testify and defend their report when legal disputes arise. A valuation is only as strong as the expert behind it.
Divorce is one example where the valuation expert's experience becomes especially critical. Each state approaches marital property differently -- some follow equitable-distribution rules, while others use community-property standards.
A valuation expert must understand these nuances to develop a defensible valuation. Dentists should seek out experts who have prepared a significant number of divorce-related valuations and who possess a track record of courtroom testimony. Hiring someone with limited litigation experience may ultimately require bringing in a second expert to review or even contradict the first report, resulting in higher costs and unnecessary stress.
Partnership disputes and the 'rainmaker' question
Valuations also play a central role in partnership disputes, particularly when determining how goodwill should be allocated among multiple dentists. These disagreements often center on identifying the true "rainmaker" of the practice: the dentist whose production, referrals, leadership, and patient relationships most directly drive revenue.
Today's practice management software provides detailed production and collection data, which can help valuation experts determine which dentist contributes the most to the practice's bottom line. In the dental industry, factors such as patient retention rates, referral networks, and market competition can significantly impact the practice's value.
Beyond numbers, valuation experts examine how the brand is built, who attracts new patients, and who has shaped staff performance and practice culture. These factors help clarify the distribution of goodwill and resolve conflicts more objectively.
When a dentist prepares to sell or transition a practice, timing and planning are everything. A transition does not happen by accident or overnight. It requires foresight, strong financial guidance, and attention to operational details.
Although historical performance matters, buyers are primarily interested in what the practice is producing today. Valuation experts often use weighted averages to emphasize recent years, which means dentists approaching retirement may benefit from ensuring the practice is operating at peak performance. Advisers frequently encourage sellers to refine systems, strengthen production, and present the practice as cleanly and efficiently as possible before beginning the sales process.
Bruce Bryen, CPA, CVA.
The amount of preparation needed depends on how well the practice has been maintained over the years. A dentist who has consistently updated systems, equipment, and financial records may only need a few months of polishing before signing a brokerage agreement.
Moreover, the meticulous gathering of relevant documents and information allows valuation experts to delve deeply into critical aspects of the dental practice, such as patient demographics, revenue streams, and operational efficiencies. Armed with this comprehensive data, experts can provide nuanced insights that reflect the true value of the practice, whether in the context of partnership disputes, buy-ins, or other legal proceedings.
Other practices may require more extensive improvements. Regardless of the starting point, early preparation usually results in a smoother transition and a stronger valuation.
Throughout these scenarios, dentists should be cautious about hiring general business brokers or appraisers who lack dental-specific expertise. Dentistry has its own language, benchmarks, and economic patterns. A valuation expert unfamiliar with these intricacies may overlook key value drivers or apply inappropriate valuation methods, leading to an inaccurate assessment.
The critical role of buy-sell agreements
Beyond individual events, practice valuations are essential components of well-crafted buy-sell agreements. These agreements protect owners from unexpected events such as disability, death, or disputes.
Yet too often, legal issues overshadow valuation issues, resulting in ambiguous or unrealistic buyout terms. A strong agreement clearly defines what "value" means within the context of the practice, whether it aligns with fair market value, includes discounts for minority ownership or lack of control, or varies based on the triggering event. It also specifies the valuation date, the methodology to be used, how cash flow should be adjusted, and whether compensation will be normalized to industry standards.
In many cases, owners each retain separate appraisers, though some agreements name a joint expert to reduce conflict and cost. The agreement must also outline who pays for the appraisal, what documentation must be provided, and whether valuation experts can conduct site visits or interview staff.
Payment terms are another important component, especially when buyouts are funded through insurance or paid out in installments rather than a lump sum. Without clear guidance, surviving family members may find themselves in challenging financial positions at already stressful times.
Because practices evolve, a buy-sell agreement is not a static document. It must be updated whenever ownership changes, when valuation assumptions shift, or when insurance coverage becomes outdated. As new partners join or others depart, the agreement should be reviewed and revised to reflect the current structure of the practice.
For dentists, the common thread across these scenarios is the value of the practice itself. Whether planning for retirement, navigating a dispute, restructuring ownership, or ensuring the financial well-being of family members, understanding the true economic worth of the practice is essential. Regular, professionally prepared valuations not only prevent unpleasant surprises but also help dentists make smarter strategic decisions throughout their careers.
Michael Lehner is the director of forensic, litigation, and valuation services at Baratz & Associates PA. A seasoned expert with 30+ years of experience, he specializes in business valuations for various purposes, including shareholder disputes, matrimonial proceedings, acquisitions and sales of businesses, gift and estate planning, succession planning, and commercial litigation. He can be reached at [email protected].
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.
