The first step in selling your dental practice is to have it appraised. An appraisal provides a benchmark to show what the practice may be worth. This will help with the price negotiations. And appraisals are typically required for banks who will be financing the deal for the purchaser (all or part of it). Appraisals are also useful for properly documenting the purchase and sale transaction because they will include a list of assets at the practice in a Schedule; this list comes in handy because the parties will agree that these assets are included in the transaction. The appraisal is typically paid for by the Vendor. Nowadays, appraisals are not prepared for the purposes of selling a dental practice, but for some other reason – such as for personal reasons or internal financing purposes. This allows the Vendor and the appraiser to limit their liability when it comes to the purchaser relying upon the appraisal without doing proper due diligence.
In the next series of blogs, I’m going to talk about how how dental practices are valued. I’ll talk about some of the valuation methods (the good, the bad, the ugly) and considerations.
Fair Market Value
Fair Market Value is a concept. And the concept goes something like this: a dental practice is worth whatever a willing buyer and seller agree upon, in light of prevailing market and economic conditions, after being adequately informed and the absence of factors which would otherwise make the parties act involuntarily (e.g. duress, undue influence, fraud, etc.). So if anyone ever asks what is my practice worth, that’s my starting point.
Rules of Thumb
I don’t like rules of thumb. The reason: they’re flawed.
Case in point, many dentists believe that the Fair Market Value for their practice is what comparable practices in the same geographic location recently sold for. But no two practices are alike. And the comparable approach doesn’t take into account the prevailing market and economic conditions. Also, two practices that are similar in size and characteristics may generate different revenues and have different cash flows (some practices are more efficient than others).
Another rule of thumb that dentists believe is that the Fair Market Value for their practice is equal to 100% of the practice’s most recent year’s gross revenues (from dentistry, hygiene and lab). But this doesn’t take into account the general marketplace: when times are tough all around, there is a lack of competition, not too many dentists, a high proportion of patients to dentists, and available financing, it’s likely a buyer’s marketplace. This means that practices generally do not sell for last year’s gross revenues because buyers wield more power and can start up their own practice instead of purchasing a retiring dentist’s practice. This is particularly true in Northern Ontario. The opposite results in a seller’s marketplace: too many dentists, not to many practices for sale, not enough patients to go around, etc. This leads to practices selling for closer to last year’s gross revenues (or even beyond it in the major cities). So relying on the 100% of last year’s gross revenues is flawed.
In the next blog, I’ll discuss the discounted future cash flow approach to valuing a dental practice (which has become and in my opinion is, the better way to value a dental practice).
Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice, contact me (Michael Carabash) or David Mayzel.
A dental appraisal involves a person giving a monetary value to a dental practice. That person is typically a professional valuator (e.g. Matt Bladowski of Dental Strategy) or an accountant. They examine the assets of the dental practice (irrespective of whether the owner of the dental practice is a sole practitioner, a partnership, or a dentistry professional corporation). They will specifically look at things like:
Buying and Selling a Dental Practice
Appraisals are needed in order for parties to buy and sell a practice. The buyer wants to know what exactly they’re getting themselves into. The seller typically engages a professional valuator to review the practice and come up with the price. Purchasers, however, should be cautious about relying upon what the appraisal says: it was paid for by the Seller and for the Seller’s benefit (i.e. to get the best possible price). In fact, if the appraisers are also brokers, then they will have an incentive t put down the highest possible price. Purchasers should conduct their own diligence about the appraisal and get a chance to review the practice, its assets, and particularly its goodwill (i.e. dental records and patient charts).
Transferring assets to a Dentistry Professional Corporation
If you are a dentist and you want to transfer dental assets (e.g. lease, inventory, equipment, tools, supplies, leasehold improvements, etc.) which you owned personally into a dentistry professional corporation, you may want to get an appraisal done. You can’t just assign any old number for the asset purchase agreement when doing these kinds of deals. The Income Tax Act allows you to elect to transfer assets from your personal to your corporation on a tax-free basis (although there may be HST payable), but only if the price paid for the assets is FAIR MARKET VALUE. If the Canada Revenue Agency ever reviews the transaction, they may say that the value of the assets being transferred into the corporation and the shares taken back were below or above what the fair market value should have been. Hence, an appraisal (coupled with a price adjustment clause in the Agreement of Purchaser and Sale) may make sense here.
Adding Partners / Shareholders
An appraisal will be needed when a new dentist partner or shareholder is being admitted into the dental practice. How much should they contribute? How many units or shares should they take back? This all depends on what the dental practice is worth. Hence, the appraisal.
Appraisals could also be required when a dentist is going through a divorce. Absent a marriage contract, prenuptial agreement, or separation agreement to the contrary, the dentist will be required to calculate their net family property (i.e. generally the increase in wealth of a married spouse during the course of the marriage) in order to ultimately get to an equalization payment. I’ve blogged extensively about net family property and equalization payments here.
Once again, it is worth mentioning that the appraisal will be made by a professional for their client’s benefit. If the husband, for example, wants to reduce the value of their net family property (so they end up paying a lower equalization payment), then there will be an incentive for the appraisal to be on the lower-end of scale.
The case of David v. David,  O.J. No. 5022 is illustrative of how different appraisers can arrive at different figures. In that case, a wife sought an equalization of net family property. The wife was a homemaker and the husband was a dentist. When it came time to value the dental practice on the date of separation, both the wife and the husband had their own expert appraisers (the husband used Graham Tuck of Professional Practice Sales and the wife used Timothy Brown from ROI Corp.).
For his part, Mr. Tuck (the husband’s expert) examined the husband’s dental practice in detail. His 23 page report (excluding appendices) included the following information:
The appendix to the report included a list of dental equipment, practice financial statements, copy of lease agreement, photographs, information on area and demographics. Mr. Tuck had personally attended the practice, interviewed the husband dentist and his staff, reviewed patient charts, and conducted a patient chart count. He also compared the value of the husband’s practice with 8 similar practices sold that had an ethnic composition in the same geographic vicinity. He ultimately found that the dental practice was worth $212,000 – which included $65,000 of goodwill.
For his part, Mr. Brown (the wife’s expert) provided a 2 page limited scope forensic letter of opinion only and relied solely on the appraisal prepared by Mr. Tuck. Mr. Brown concluded that the goodwill could have been about $139,500 for the dental practice – much higher than Mr. Tuck’s opinion.
Now, just keep in mind that the wife (a homemaker) had been accusing her dentist husband of diverting income. Clearly, the wife wanted the value of the dental practice to be relatively high, while the husband wanted it to be relatively low.
The Ontario Superior Court of Justice ultimately fixed a midpoint value between the two opinions at $102,500 for the goodwill and a total value of the dental practice at $249,000 at the date of separation. In coming to that conclusion, the court took into consideration: the age and location of the dental practice, the patient base, the management style and office protocols of the dental practice, data from another similar practice which the dentist had previously sold, a commonsense and market comparison capitalization rate (i.e. the yield of income to capital).
David Mayzel is your legal risk manager. He is a trained courtroom lawyer and has spent many years resolving disputes both in and out of court. He knows how to prepare documents and execute transactions in a way that avoids or mitigates legal risks. He can be reached at 416.528.5280. or firstname.lastname@example.org.
Michael Carabash is your business law adviser. He is an entrepreneur at heart who helps you see the big legal picture. He drafts clear and effective agreements that protect your rights while promoting your interests. He can be reached at 647.680.9530. or email@example.com.
Ljubica Durlovska is your transition lawyer. She helps you with staff and associates, maintaining your corporation, and other business matters. She can be reached at 416.443.9280, extension 206 or firstname.lastname@example.org.
Jonathan Borrelli is your employment lawyer. He helps you with staff and associates matters, including hirings, terminations, switching staff to written contracts and resolving disputes. He can be reached at 416.443.9280, extension 204 or email@example.com.
Benjamin Kong is an experienced business law clerk. He assists David and Michael with corporate matters and purchase / sale transactions. He can be reached at 416.443.9280, extension 207 or firstname.lastname@example.org.
Julie Whitehouse is an experienced business law clerk. She assists David and Michael with corporate matters and purchase / sale transactions. She can be reached at 416.443.9280, extension 203 or email@example.com.
David, Michael, Ljubica, Jonathan, Ben and Julie are a truly dynamic team. Their diverse knowledge, skills, and experiences will help you get the best deal possible while promoting your interests and protecting your rights. You can read dentist testimonials here.