6 THE ADA PRACTICAL GUIDE TO VALUING A PRACTICE The Seller’s Perspective A seller may view the value of the dental practice as a partial measure of his or her professional life. It is not unusual for a seller to attach personal and emotional value to a dental practice, built through many years of professional devotion to patient service. Although a seller may attach substantial emotional value to a practice, he or she should recognize that buyers generally approach the purchase of a practice strictly from a business standpoint. Although a seller should expect to receive a reasonable price, he or she must realize that a dental practice only has value if someone is willing to buy it. This requires sellers to understand dental practice valuation from a buyer’s perspective. In other words, a seller must realize and accept the fact that a buyer must be able to cover practice-related expenses, draw a reasonable salary and service the debt incurred to purchase the practice in a reasonable period of time. Unless the buyer can accomplish these objectives, he or she will look elsewhere for a practice or negotiate the price to a lower level. Although a seller may attach substantial emotional value to a practice, he or she should recognize that buyers generally approach the purchase of a practice strictly from a business standpoint. It is imperative that sellers view fair market value in this manner, especially if they are going to finance some portion of the practice sales price. Without a feasible financial arrangement and a reasonable sales price, the new buyer may not be able to service the debt. If this happens, the practice may revert back to the former owner at a significantly reduced value. The seller may not desire, or be in a position to, practice full-time, especially if he or she has retired and moved. Finally, the seller, as a courtesy to former patients, should try to assure the new owner’s success. Thus, the essence of a successful transaction is to negotiate a fair price — one that both parties are comfortable with and consider reasonable. When Should a Practice Be Valued? Although anticipation of a total practice sale is a common time for establishing the value of a dental practice, there are many other situations and times a practice valuation should be considered. Common situations or times when it may be appropriate to determine the fair market value of a practice are listed below. Sale of an Entire Dental Practice Prior to placing a practice on the market, the owner should have a valuation performed by a qualified independent appraiser. It is in the seller’s best interest to retain an appraiser, rather than establishing an asking price first and expecting the buyer to secure an appraisal if he or she does not agree with the asking price. Securing an appraisal before marketing a practice helps in establishing an asking price that isn’t too low or too high. A seller would obviously not want to establish an asking price that is lower than the fair market value. If the asking price is substantially higher than the fair market value, it will likely be difficult to market and sell the practice. Establishing an unrealistic asking price is usually a waste of time. If the owner is serious about selling his or her practice within a reasonable period of time, securing a thorough practice valuation by a qualified and experienced business valuation specialist will facilitate the transaction. If the seller has obtained a reputable appraisal, this often allows the buyer to make a decision concerning the purchase of the practice without obtaining a second appraisal. Information concerning finding and selecting an appraiser are covered later in Chapter 6: Preparing for the Sale and Using Advisors. Depending on the type of valuation method used and the extent of the valuation report provided, obtaining an independent valuation may also help in determining a defensible allocation of assets in the contract of sale. Unless corporate stock is being sold, the agreed upon purchase price must be allocated to the various assets being purchased and sold, e.g., equipment, supplies, leasehold improvements, covenant not to compete,