Existing dental practices have value for dentists who want to begin a practice. They can avoid start‐up problems and gain a continuing business with patients and cash flow. The problem is deciding how much they will pay to buy an ongoing practice compared to other professional options. In this sense, the actual price is irrelevant. “How much does the practice cost?” is the wrong question. The right question is “How much will I make while I pay off the practice loan compared to other options?” A dentist can live comfortably while paying off a practice loan if a practice is fairly valued.

WHY VALUE A PRACTICE?

There are several common reasons dentists might want (or need) to set a value for a dental practice. Unfortunately, the most common is to figure out the value of shared assets in a divorce settlement. As a rule, all assets gained in a marriage are common assets, and spouses must divide the value in a divorce. (Some states consider them to be personal assets.) The dental practice is often an essential and contentious marital asset to divide. A dentist may also want a value attached for buying (or selling) the entire practice or buying into a practice as an owning partner. The third common reason for valuing a practice is for general financial and estate planning purposes. If, for example, someone wants to know how much retirement income to expect from the sale of a practice, they need an accurate estimate of its value.

A dentist will probably use someone who is an expert in practice valuation to help in setting a price and in the practice transition. They will do this once or twice in a career, and the experts do it many times a year. They know how to set reasonable values, find buyers, and set up financing plans and tax compliance. Dentists should concentrate on their area of expertise, clinical dentistry, and hire a consultant to help with other business areas.

GENERAL RULES OF PRACTICE VALUATION

There are several general rules to remember when valuing practices.

METHODS OF VALUING ASSETS

Several methods help determine the value of the various components of a practice. Each has strengths and weaknesses.

• The fairest method is the FMV. The FMV is an estimate of the willing buyer and willing seller method already described. Another way of viewing FMV is to think of an estimated price that someone would give at an auction, with interested, informed people participating. There are no “blue book” values. There are rules of thumb for determining FMV, some useful, some less so. Until the asset trades hands, neither the purchaser nor the seller knows its value.
• Replacement value is the cost of replacing the equipment with a new, similar asset. This method overstates the value because the asset sold is generally not new, and used assets need more repair and maintenance than new ones. A problem with this method is that there may not be a new similar asset from which to learn the value.
• Accountants often use the book value to calculate the value of assets. Book value is the purchase price reduced by any depreciation or amortization charges taken against the asset. For example, a dentist has a dental chair that they bought new for $20 000. After three years, the dentist has taken $13 000 in depreciation expenses. The value “on the books” (book value) is $7000 ($20 000 – $13 000). The problem with this method is that it is primarily determined by the depreciation method used. This is determined by the IRS estimate of a “useful lifetime,” which may bear only passing similarity to the actual useful lifetime of the asset. Some methods speed up the depreciation deduction for tax purposes. To solve these problems, some accountants use an “economic depreciation” figure, which tries to account for actual useful lifetimes and depreciation methods. Although better than a straight book value method, it is still subjective, although accountants claim it is less so than appraisal methods. In the preceding example, the dental chair may have an actual useful lifetime (economic lifetime) of 15 years, although the owner depreciates it (for tax purposes) over 7 years. The “economic depreciation,” based on a useful economic lifetime of 15 years, is 3/15 × $20 000 or $4000. Based on this economic depreciation, the “adjusted book value” of this asset is $16 000 ($20 000 – $4000). If the adjusted book values of all the office assets are added, an estimate of the value of the tangible practice assets can be derived. Similar calculations for financial assets, such as accounts receivable, can also be derived.