Divorce and Practice Appraisals

I recently corresponded with a potential client who is going through a divorce. Her husband, a dentist, and his attorney were telling her that his two practice's had no monetary value since the dentist did not own the real estate where they were located.


While I understand that divorce is generally a very difficult issue and often ugly, I have to say such a statement is not only unethical and deceitful but also childish and laughable.


Real estate appraisals are separate from practice appraisals. If it is a going business, the value of the practice is based upon its ability to generate a revenue stream for the owner.


But even if the practice had folded, there would still be value in the assets of the practice: equipment, furniture, supplies and sundries. While liquidating assets generally returns only a fraction of their original cost, it does create value.

Yet even if all of the equipment and furniture were leased and there were no supplies and sundries, there would be still value in the patient charts. Such is the case when a dentist passes away. If the estate takes several months to come to a decision on what to do with the practice, there will eventually be a value on the patient charts which a new owner would be willing to pay. It would not be nearly what it is for a going business, but neither would it be insignificant.

Having been so dumbfounded by the doctor's and his lawyer's bald-faced lie, I felt compelled to post a little reality to help with the confusion.

Dentist's Practice Appraisal Wants vs. Needs

The two conflicting challenges of doing a dental office appraisal are 1) establishing a "Fair Market Value" and 2) providing the client with a satisfactory sale price.

Generally, a dental practice appraiser is supposed to provide a Fair Market Value, which is, by definition, one that is just and reasonable for all parties involved.

However, each party comes with their own wants and needs with regards to the establishment of a practice value (usually a purchase price). And it is generally the Practice Owner who contracts with and pays the appraiser.

Usually...

• The current owner wants a high value.
• The potential owner wants a low value.
• The divorcing owner wants a low value.
• The estate of the deceased dentist wants a high value.
• The associate wanting to partner in the future wants a low value.

It is, of course, the appraiser's responsibility to understand the various forces pulling him or her in opposing directions, while trying to maintain an independent point of view.

I'd be interested in any comments or experiences sellers or buyers of dental practices have had in regards to whether the Fair Market Value from their appraiser seemed fair or biased.

Best wishes for a happy and safe holiday season!

Todd Christensen

Success@AssistToPractice.com

Dental Practice Appraiser

Can Your Practice Have Multiple Fair Market Values?

Certainly! The Fair Market Value of a practice can vary wildly, depending up the purpose and use of the valuation. The true value of any practice is only what someone else is willing to pay for it. And "someone else" will judge the practice's value based upon their perceptions. And perceptions are impacted by a great number of circumstances.

Here are just a few:

1. Sale to a potential buyer looking at the practice right now
The buyer sets the true price, though a professional appraisal should provide a practical value range that the seller can use to bolster his or her position. The buyer generally looks at past performance to determine future potential value. However, everything from the color of your equipment to the personalities of your staff members will affect the potential buyer's perceptions of the practice's value.

2. Sale after the death of the owner
With every day that passes after the death of a practice owner, the value of his or her practice decreases sharply. As the news of his or her passing reaches the patient base, uncertainty regarding the practice begins to lead the patients to set appointments with other dentists. Having a practice value established beforehand, and having an emergency transition agreement in place with a professional colleague can minimize the patients' perception of the practice's continuity and provide for an efficient and expeditious transition upon the owner's death.

3. Buy in of a current associate
   Establishing the Fair Market Value of a practice in advance of an associate-to-partner transition can be a complicated equation. On the one hand, the original owner (who naturally wants to maximize the practice value during the transition) perceives that the years of hard work placed into his or her practice includes the potential value the new partner brings into the practice. On the other hand, the potential partner (who naturally wants to minimize the practice value during the transition) perceives that his or her contributions to the practice should be excluded from the practice's current value. It will likely take a skilled and experienced appraiser to help both parties understand where the "Fair" Market Value truly is. It may seem contradictory to say it, but both doctors have valid arguments. The challenge is to reach an agreement perceived by both doctors as "fair," who, after all, want to form a long-term partnership of working together in a positive and constructive relationship.
4. Distribution of Community Property (Divorce)
   In the unique case of divorce, there is generally not an actual buyer for the practice. In such situations, the Fair Market Value is determined by a third-party appraiser and must satisfy the perceived values of the court and all parties. Consequently, the appraisal must be thorough and include reasonable arguments and justifications for the established Fair Market Value.

Getting your practice appraised is an important decision. Make sure that the professional appraiser understands your purposes and the ultimate goals of the valuation.

We're Not Invincible Teenagers Anymore

I generally and thoroughly enjoy this career that I've chosen. However, there is one type of phone call or email that is understandably heartbreaking.

It usually begins with the individual introducing themselves as the son, daughter or spouse (or someone representing such individuals) or a dentist.

Next, they explain that their father or spouse had an unexpectedly injurery or illness that took their life.

Finally, they share that, having endured a week or two of numbness during which they have eulogized and buried someone they had hoped would be around forever with them, their thoughts have turned to their loved one's dental practice.

Often, a friend or a professional acquaintance will step in on a temporary basis to handle the appointments on the books.

But questions from the family members naturally come up:

• What am I supposed to do with the practice?
• So and so has expressed an interest in purchasing it, but what's a fair price?
• This was supposed to be part of our retirement plan, but how do I know what its value it now?

As we all know, it takes only a few days for a large percentage of the patient base to learn of their doctor's death. Their have their own questions, which often concern their future dental care. They wonder, as do the dentist's family members, what will happen to their dental office. Unfortunately, if their questions aren't answered in a timely manner, they assume that they will be left to find another dentist on their own. Consequently, a quickly dwindling patient base means that the dental practice value drops precipitously in a matter or a few days to a couple weeks.

I've appraised practices whose doctors have been deceased for less than a month, and the potential buyers know, not from any greed or ill will, that the actual value of the practice is at best half of what it used to be.

Such scenarios perhaps best illustrate the need to have your practice appraised now. Many appraisers, such as Assist to Practice, will update it every three years or so for no charge.

With an updated appraisal in place, your practice's value will be set and ready for any such eventuality. Dentists should also have in place an arrangement with a friend or other professional to not only step in and fill in during emergencies, but also seek financing for the purchase of the practice as a whole.

Think of the peace of mind such arrangements could provide you and your family. Contact a professional appraiser today. Explain your reasons for having a practice valuation done, and make sure to have it updated every few years.

I Ain't Selling, so Why Appraise?

It's a common assumption (and misconception) that a practice should only be appraised in advance of its sale.

Even without an upcoming practice transition, there are several compelling reasons dentists may have to get their practice appraised, including:

• Life Insurance Review and Planning
• Estate and Gift Tax Planning
• Division of Community Assets (Divorce)
• Future Buy-in/out Arrangement with an Associate
• Formation of Partnership or Group

Dental practice owners need to approach such events and projects with information about their practice value in order to make the best decisions to help them reach their short and long-term goals.

A good practice appraisal should include more than just the estimated fair market value of the practice. But that's a subject for another day.

Appraisals and Tax Returns

When it comes to appraising the value your practice, what matters to the potential buyer has got to be the potential income stream that it may generate for them in the near and long terms.

Yes, having the latest equipment is nice. A bright and freshly painted office space is important. But purchasing the practice is pointless if there's little possibility of procuring a projected and periodic pecuniary profit. Get the point?

When I've spoken with dentists about a given practice's appraised value, they often ask to see the tax returns. While I garner much information from the returns myself, I also ask the potential buyers and partners to consider the reckoning behind the numbers.

Practice owners and their accountants have every reason to minimize the practice's income they report to the IRS. Unfortunately, this can also give the impression that the practice's financial benefits to the doctor are less than they actually are.

Beware of any appraisal based soley (or even heavily) upon tax returns. An accountant's handiwork should be just one of many tools used to set the practice’s appraised value.
Practice value is, to a great extent, subjective. To the potential buyer, the practice value may involve the desirability of the office’s physical location, its image, the practice’s patient profile base, how well the practice's procedural profile fits the potential buyer's experience and professional goals, the practice's location relative to a metropolitan area, and, among many other things of course, the compatibility and longevity of the current staff.

Practice Appraisal Software Limitations

Like Rules of Thumb, software programs designed to simplify in-depth projects that involve complex reasoning and reduce them into simple and cost-effective, step-by-step processes can often provide unexpected results with unexplained outliers for answers.

Using a software package to create a practice appraisal will certainly be more affordable than employing a professional appraiser. However, since such programs have not years reached the point of human reasoning, they might appear to provide little better than the old Rule of Thumb appraisal technique of equating the practice value with 60% of the previous year's production. Compare two practices with equivalent production, one with a 95% collection rate and the other with a collection rate in the mid-70%, and you'll quickly see the limitations of this Rule of Thumb.

While appraisal software is (and should be) much more involved than this, it can never answer the question of what the real value of a practice is. And that answer is... whatever someone else is willing to pay for the practice. Plain and simple.

Current technology cannot gage a market nor engage potential buyers to determine the practice's true monetary value. Such vital questions can only be answered through human interaction.

By all means, take advantage of appraisal programs. They're affordable, interesting and, I dare say, fun! But be aware of their limitations. For important appraisal needs (sales, partnership formations, associate-to-partner opportunities), please call an experienced professional.

Personal Financial Goals for Dentists and their Spouses

You've likely got a mission statement (or at least you should) for your practice. But have you written down your "personal practice goals?"

I'm not talking about how many new patients you want each month or what production level you need to achieve. I'm talking about writing down what YOU want to achieve and do... personally.

Why did you go into dentistry? Besides the pleasure of being your own boss and the satisfaction that comes from the artistry and challenges of the work, you most likely also considered the financial rewards of the profession.

Here are a few goals that, if you haven't done so already, you should absolutely have written down and even carry with you:

1. What do you want to do in the next 6 months that will require money? In the next 18 months? In the next 5 years? These are UNRELATED to your practice. These are personal goals that will motivate you to create and stick to a spending plan. If you're married, you and your spouse should discuss them together and both agree to them. Again, post them where you both can see them. It's the single most important thing you can do to find common ground and "stay on track" financially.

2. How much of the money required from goal #1 will need to come from your practice? Let your personal goals guide your practice goals.

Too often, we let our business goals detract us from or even set our personal goals. We falsely assume that if we're making as much money as our practice possibly can, we'll find financial satisfaction in our personal lives. But without the written personal goals to guide us and to measure our progress, such satisfaction will frequently remain illusory.

I may be a practice appraiser, but I am also a certified personal finance counselor. As such, I will also use this blog from time to time to provide you with ideas and suggestions for increasing and determining not only your practice's value but also your net worth.

Best wishes for practical success!