Often when we talk to sellers who have attempted to sell their own practice, they say the asking price was set by reading a few manuals, asking a few friends, glossing through posts on message boards such as Dentaltown, or even just setting a “percentage of gross” of some kind. Some transition companies also use only a “rule of thumb” percentage of gross revenues to set purchase prices. While these methods can be successful for some, in many cases, if there is actually a sale, one party may have paid too much or the other may have received too little. There seems also to be a feeling that neither party needed a valuation report or an expert on valuations involved.

The reality is, a proper evaluation of the value of a practice is important for every transaction, most notably when planning for retirement. It has been stated several times that your practice is very likely the most valuable asset you will ever own. We see this ring true, over and over and over. If you don’t know what that asset is worth, how do you effectively plan for the rest of your life? That is a lot of money to leave to a “guesstimate.”

The same can be said in a sale. Why trust a guesstimate that may or may not be financeable, or may or may not even be palatable or workable to a purchaser? Why take the chance of misreading the market and leaving money on the table or overpaying in taxes, closing costs or even legal/accounting fees?

Beyond the benefit of ensuring that equipment and intangible assets are properly valued in a sale to a third party or for gift and estate tax purposes, in the event of a sale to a family member it is also important to review Treasury Regulation, Subchapter B, Sec. 25.2512-3, which discusses the importance of a valuation and the ramifications of an improper valuation. If the valuation claimed is less a certain percentage of the actual value, a varying (significant) penalty will be imposed on the amount of the understated value.

If you are considering the transfer or sale of your practice (especially in the case of selling to a family member), acquire a true practice valuation (see our previous article, “When Is an ‘Appraisal’ Not an Appraisal? Why Sellers Need to Know the Difference”) or at least consult a true expert to determine a real value for your practice.