THE ADA PRACTICAL GUIDE TO VALUING A PRACTICE 7 patient records and goodwill. Although there is always a certain amount of negotiation concerning the allocation of the sales/purchase price to these various assets, it is important that there be justification and rationale for the allocation. Without justification, the Internal Revenue Service (IRS) could challenge the allocation at a later time and modify it in a manner that would be less advantageous for the seller or buyer for tax purposes. Another reason for conducting a thorough dental practice valuation is to help ensure the financial solvency of the sale terms if the seller assumes a portion of the financing. Sellers who provide a portion of the financing do not want buyers to fail, especially if the seller is retiring and is not interested in reassuming the practice. Grossly inflated sales prices could unfortunately lead to buyer insolvency. A well-performed practice valuation should also support the decision-making process at a financial institution, improving the buyer’s chances of securing financing. Financial institutions will not generally provide a loan to a prospective buyer if the sales price is not reasonable. Banks and other lending institutions are generally hesitant to approve practice loans unless they perceive that the price is reasonable and allows the buyer to retire the debt in a reasonable time. A complete appraisal report can also be a great marketing tool when selling a practice. A good appraisal report will provide detailed background information about the practice, a description of the valuation process with clear and understandable methods and techniques used to determine the value. It will answer many of the questions of prospective buyers. In fact, some appraisal reports include materials, information and analyses that help project how a buyer could potentially retire the debt incurred to purchase the practice. Sale of Portions of a Dental Practice Another popular method of transferring the ownership of dental practices involves the sale of a portion of the practice. This alternative is especially attractive to dentists who want to “phase down,” but not “phase out” of the practice. Discord is frequently encountered with this transaction type when the total purchase price, and any portion involving the remaining balance of the practice, is not agreed upon prior to the buy-in. This disagreement can be quite intense, especially if the original owner has phased down and the newer owner is now producing the bulk of the practice’s revenue. This issue will be discussed more fully in Chapter 4: Factors Complicating the Valuation Process. Associate Arrangement with a Future Buy-in or Buy-out One of the most common problems associated with buying and selling dental practices is conflict between an associate and an owner concerning the price to be paid by the associate for the purchase of all (buy- out) or a portion (buy-in) of the practice after the associate has been involved in the practice for a period of time. A possible cause for this disagreement is that the two parties never discussed the purchase price prior to the associate joining the practice. Although there is some debate as to whether an exact purchase price should be established prior to the associate joining the practice, there is little disagreement that the two parties should at least have a reasonably good understanding of the current value of the practice when the associate first joins the practice. Performing a practice valuation prior to the associate joining the practice will provide both the owner and 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.