When a dental practice valuation moves from the accountant's desk to the courtroom, the stakes change dramatically. The quality of the work matters, but so does the evaluator's ability to navigate the legal process with professionalism, preparation, and credibility.
Here is what dentists and their attorneys should know before that moment arrives.
Preparation matters
As legal cases proceed to trial, there are critical questions dentists should consider in evaluating the conduct and professionalism of their expert witness, including:
- Is the dental practice evaluator prepared for the trial?
- Will he or she show up on time at the courtroom?
- If the trial is in a faraway city, will the evaluator arrive one day early in case of flight delays or other unusual circumstances?
Bruce Bryen, CPA, CVA.
With all the hard work that the evaluator has done to prepare the dental practice valuation, is he or she ready for the next step in the process, which almost always involves a settlement conference at the court? Preparing for the settlement conference is almost as time-consuming and stressful as preparing for the trial, if there is no settlement agreement.
Conferences must take place with the dentist present to review the strategy for the conference, including forethought as to what the adverse party is likely to argue.
The settlement conference may be held at the direction of a third-party attorney who is independent of the litigants. The arbitrator of the settlement meeting will typically offer his or her advice about how the discussions are proceeding. In many instances, the arbitrator will share their opinion about the decision the judge is likely to make based on the evidence and data.
This pretrial conference can either be unsettling for the litigants or it may invigorate them so that the dentist, valuator, and his or her attorney are better prepared for the actual court proceedings. However, if, for example, the valuator is late to the arbitration hearing or is a no-show, it should be a warning sign for the dentist. And if the expert witness certified public accountant (CPA) is not wearing the proper attire for the hearing, that, too, can reflect poorly on the dentist and his or her counsel to an arbitrator and judge.
From credentials to the witness stand
The real test of a dental practice evaluation is how it is received by the arbitrator and, more importantly, the judge. In selecting a valuation expert witness, consider these questions:
- What is the evaluator's track record of appearing at pretrial conferences, arbitration hearings, and settlement discussions to support their conclusions?
- In how many trials has the evaluator been qualified by the court and testified as an expert witness?
- How does their dental practice valuation compare with the adversarial party’s valuation?
- Are there material differences between the two valuations? If so, what explains the differences?
- Does one valuation have a lot of normalization add-backs? If so, why?
- Are personal items in one valuation removed but not in the other? Such discrepancies can be proof that one of the evaluators did more analysis of the profit and loss statement to determine the practice's profitability.
Without engaging in a full audit or applying a forensic accounting approach to the dental practice valuation, it is difficult to determine personal information from a practice's financials. Unfortunately, the cost of conducting a full audit or using a forensic accounting approach can be prohibitive, and it is rare to use either method when preparing a dental practice valuation.
Perhaps the only reason these approaches would be used is if a dental service organization (DSO) were involved. Because of the DSO's size, the gross revenue it produces, as well as the presence of outside investors such as hedge funds, venture capital companies, and other practices included in the DSO, a more in-depth analysis may be needed. DSOs also seek future expansion, including adding more practices under its umbrella, so a thorough valuation can provide some assurance that no irregularities have taken place.
Weighing the timing, cost, and reliability of the valuator's credentials
For a larger entity, such as a DSO, the evaluator’s fee is less important than his or her reputation. For the acquisition of a solo practice or a multilocation practice, affordability is very important. The evaluator's credibility is important as well, but in these cases, a local evaluator suffices, because there are fewer people involved with the transition.
In addition to the practice evaluator, the practice buyer will also have his or her lender review the documents for the loan, which finances the acquisition and provides working capital to the buyer dentist.
Because the cost is lower compared to DSO-involved transactions, multiple professionals must review the documents, starting with the practice buyer followed by the attorney, the buyer's CPA, the lender, and its review committee. Lenders are typically cautious disbursing bank funds to borrowers who appear to have limited financial reserves, as many can attest to having gone through the loan application process.
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.
