10 THE ADA PRACTICAL GUIDE TO VALUING A PRACTICE price or may have based the asking price solely on what he or she perceived would be acceptable. In most cases, the circumstances of the local market (i.e. area demographics such as patient, dentist and employment) will have a great influence in the determination of the actual price for a dental practice. Second, the type of ownership purchased may also result in a difference between the asking price and the sale price. Ownership could reflect a controlling interest or a minority interest. Controlling interest in a practice means the controlling owner has the authority to make decisions regarding the practice operations, pricing, cost structure, and capital financing requirements. A minority interest is one in which the owner does not have the aforementioned authority, but may simply be a profit- sharing owner. Controlling interest is more valuable than a minority interest, and while a seller may be asking for a price commensurate with a controlling interest, the buyer may only want to purchase at a sale price more commensurate with a minority interest if control is not awarded in the transaction. Third, the circumstances of the dentist who eventually purchases the practice may significantly impact the amount he or she is able and willing to pay for a practice. The price a particular dentist is willing to pay for a practice is dependent on his or her personal financial situation, perceived ability to manage and handle the practice and the ability to obtain acceptable financing. Certain synergies may be at play whereby the practice may be worth less than the appraised fair market value or asking price to one buyer, but worth more than the practice’s fair market value to a different buyer. It is important to understand the local market, political and economic conditions, investor objectives (if possible), financial conditions and opportunities, and the latest skills and techniques in valuation in order to develop a reasonable value for a practice. Lastly, another reason for this difference may be that both sellers and buyers expect that the eventual sales price can be negotiated down from the asking price. Similar to a real estate transaction, this expectation can result in a seller establishing an asking price that is higher than the price he or she expects to receive, knowing that some negotiation will be necessary. This expectation leads some buyers to assume that unless they can negotiate the sales price lower than the original asking price, they will have paid too much. Terms Another important aspect of buying or selling a practice is the relationship between the sale price and the sale terms. Receiving the full purchase price at closing is quite different from receiving the same total amount in monthly payments over an extended period of time, due to the time value of money and the risks associated with carrying part of the financing. A seller assumes certain risks by financing a portion of the sale over an extended period of time. Therefore, it is not unreasonable for a seller to ask a higher price and factor an appropriate interest rate into the periodic payments. Conversely, because of the reduced financial risk for the seller, it would not be unreasonable for a buyer to expect that a seller would agree to a lower price if the buyer could pay the entire purchase price in cash at closing. Another issue relates to the down payment. Since most buyers do not have sufficient personal assets for a substantial cash down payment, they must usually obtain a commercial loan for this purpose. As a condition of approving the loan, a financial institution may require a first collateral position on the assets of the practice. Thus, the seller’s interest would be subordinate to the first position of the bank, potentially leaving the seller in a less secure financial situation in the event of non-payment. The previous issues are only some of the important aspects of the relationship between fair market value, price and terms. It is critical that buyers and sellers understand these and other issues, and possible trade-offs. It is also important to obtain qualified legal, financial and tax advice concerning intended practice purchases and the terms of any arrangements.