Practice valuations

A Proveer Practice Management client wanted to purchase a practice where he was working as an associate. Before negotiations began, the seller provided a professional valuation that included three assumptions that caused the valuation to be 30% higher than it would have been under the assumptions I thought more appropriate. (The discrepancy led to some interesting discussions, but that’s another story.) Such a discrepancy calls for insight into the limits and uses of a valuation.

Limits of valuations
In this case, a few numbers on paper had a 30% impact on the estimated value of a multi-hundred thousand dollar transaction. The seller wisely stated, “The valuation is just a number.” Ultimately, the price is determined through negotiations between buyer and seller.

Each valuation firm employs its own valuation methods. Somewhat surprisingly, two practice valuation books published by the ADA are inconsistent with each other on some points. Further complicating the matter, the value of a dental practice is context specific. What is the value of the practice to a dentist versus a non-dentist? What is the value if sold as an intact practice versus parted out asset by asset? What is the value to a young dentist versus a dentist near retirement? What is the value to the dentist versus spouse in a divorce? What is the value in an orderly sale versus a fire sale due to death or disability? Such questions suggest there is no such thing as a single “value” for a practice.

Uses of valuations
Nonetheless, the economics and analysis underlying a valuation can provide real insight to a buyer, seller, or dentist who plans to continue running her practice. For example, when working with one client, we used valuation techniques to show he could pay roughly a quarter-million and turn the practice into something worth almost a half-million with some practice management changes. An understanding of the sources of value can also aid management of an ongoing practice or help prepare a practice for sale.