What's the purpose of a dental practice valuation? It is the ending or the beginning of the answer that parties to a dispute are undertaking to find.
When there is a question about the value of a dental practice, one solution is to retain a qualified dental practice evaluator. By doing so, the total value of the dental practice should be made available to the parties wondering about the fair market value.
Bruce Bryen, CPA, CVA.
There may be some objections or points of concern with the valuation, so another practice valuation may be desired to compare the two approaches before agreeing on the value. If the disagreement as to value cannot be settled, then the courtroom may be the next step. But what happens if the question is not the total value of the practice but a partner or shareholder’s interest in that value?
Suppose one participant owns a 50% interest and has always been the lower producer of revenue. Does it matter what the other owner paid for his or her share? Suppose this lower-producing co-owner wants to sell their 50% ownership.
If the dental practice value is high, it may be because the owner with the larger share of production made it that way. As the lower producer of revenue may wish to merely use the total value of the dental practice and divide it by two, the owner with the larger production amounts may argue that approach is unfair given where the real value of the dental practice emanates.
The value of the dental practice at 100% is not the same as the value of each owner’s share when added together. Effectively, the sum of the parts is not equal to the sum of the whole. In this case, the sum of the parts is less than the sum of the whole. If the situation were reversed and the owner with the higher production was selling his or her interest, that value would be higher than in the case of the lower producer selling their share.
What happens to each party's share and the lower producer’s ownership interest?
Another dental practice valuation must be prepared, whereby each owner’s interest is evaluated separately. When this assessment is completed, it will likely produce a valuation of each interest that does not equal the total dental practice's value when appraised separately.
Since the lower producer’s interest is being sold and that party is leaving the practice, he or she will want the highest amount available for that 50% interest. This may be another situation where the parties litigate to settle the issue. Even though there may be an obvious difference in production, the dentist with the lower production may argue that it does not matter because he or she owns 50% of the practice.
Evidence supporting the dentist with higher production but a lower price should come from professional dental publications, like books, papers, and magazines. The lower‑producing dentist will struggle to justify valuing their shares at half of the practice's total value.
Even though there are attributes accounting for the value of a partial interest in a dental practice, administrative responsibilities -- such as meetings with the dental CPA and the practice attorney -- consume a tremendous amount of time and could be a reason for lower production. Being involved with the hiring and firing of personnel also costs time away from the chair. These may be some of the issues raised by the lower-producing dentist.
Of course, the dentist with the higher production can easily argue that if it were not for the revenue he or she produces, there would be fewer employees to hire or fire and fewer meetings with the dental certified public accountant and the practice attorney. Here, too, things can get contentious, and another trip to the courtroom may be scheduled.
The name of a dental practice can easily be changed, but the location is difficult to change, especially if it is a long-running practice. Many practices owned by two or fewer dentists have ownership interests in the building housing the practice.
Conflicts to beware of in a small dental practice
Are the dentists' spouses or domestic partners working at the dental practice? Do they hold positions important enough that if a spouse or partner left, it would cause difficulties at the dental office? This consideration is something to be mindful of, even though it appears to have nothing to do with the practice's value.
A shift in working relationships among people each party has known for years can wreak havoc on employee relations, and with patients as well, since they may sense the tension in the office.
No one wants this to happen, so each owner has to judge how far to go and decide if the extra money is worth the additional legal fees and aggravation that await if things are not settled amicably.
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.
