THE ADA PRACTICAL GUIDE TO VALUING A PRACTICE 9 Formation of a Partnership or Solo Group When two or more dentists form a partnership, limited liability partnership or company, solo group or single professional corporation, it is advisable to obtain a valuation of each of the existing practices prior to the formation of the new entity. This is critical if the entity being formed will own the combined assets of all practices involved. Unless the value of the assets that each dentist brings to the new entity is determined, there could be major problems if one or more of the dentists decide to leave the new practice. Unless the value of the assets that each dentist brings to the new entity is determined, there could be major problems if one or more of the dentists decide to leave the new practice. Division of Marital Assets in a Divorce Settlement One of the most important reasons for valuing a practice concerns divorce proceedings. Although there are considerable differences among states, the distribution of a practice’s value may be required in certain divorce proceedings. Significant differences of opinion concerning the value of a dental practice may occur in such situations, especially when the value of the practice’s intangible assets is considered. For example, personal goodwill is an intangible asset that could make up more than 70 percent of a practice’s value, and may or may not be transferable. Therefore, a dentist involved in a divorce may need a practice valuation by an experienced appraiser who has provided depositions and testified in court. Selection of an appraiser should be done in conjunction with the dentist’s attorney. The appraiser must also understand what standard of value and what valuation methods are appropriate for the state in which the dentist’s practice is located. A dentist can be very surprised when the valuation he or she has secured is thrown out by a judge and the valuation secured by the spouse is accepted because the spouse’s appraiser used the appropriate standard of value (definition of value) and applied the appropriate valuation method. It should be noted that using a different standard of value and applying a different valuation method can result in outcomes that may be significantly different. Fair Market Value, Price and Terms Fair Market Value A practice’s fair market value is only one of several financial issues that are important when a practice is being bought or sold. Before an actual price is agreed to, the buyer and seller also must discuss how the price will be allocated to various practice assets and the terms of the sale. Buyers and sellers should understand the difference between fair market value, asking price and sales price. Although fair market value is theoretically determined by the transactions occurring in the marketplace, for most purposes it is determined by applying reasonable and acceptable valuation principles and techniques. In other words, fair market value is often viewed as the outcome of an objective, independent practice valuation or appraisal. This may or may not be the price that a specific dentist eventually pays for the practice, but rather the price that a reasonable and logical buyer should be willing to pay for the practice. Price The asking price is the amount the seller initially stipulates he or she wants for the practice. The asking price may or may not be identical to fair market value. The sale price is the actual amount paid for the practice. There may be a significant difference between the asking price and the eventual sale price, due to several factors. First, the asking price may have been established without first performing a practice valuation. It may be that the seller applied an inappropriate rule of thumb for determining asking
Previous Page Next Page