Purchasing a dental practice is one of the most significant financial and professional decisions a dentist will make. While location, patient base, and growth potential often receive the most attention, understanding how the practice is valued is equally critical. Not all valuation documents are created equal, and failing to recognize the differences can lead to confusion, inflated expectations, or unnecessary risk. In anticipation of acquiring a dental practice, three types of documents could be encountered during the process: a Broker’s Opinion of Value, an Evaluation, and a Business Valuation. It is therefore important to have a basic understanding of what these three documents represent, their differences, and inherent flaws within.
A Broker’s Opinion of Value is a simplified document that highlights the broker’s individual experience and opinion regarding the potential sales value of a dental practice. This document is typically limited to a one, perhaps two-page summary, that often fails to describe in detail how the opinion was developed. Rather, this document only displays the broker’s self-prescribed, prospective opinion at transaction. The inherent flaw with this document lies in understanding the financial interest and incentive that a broker maintains to obtain and appease the client. Paid on commission, business brokers can often inflate their own worth by overstating the value of the practice, leading to the eventual detriment of both the buyer and seller. Therefore, a healthy dose of skepticism is warranted when approached with a Broker’s Opinion of Value.
An Evaluation, though similar in name, also differs significantly from a Business Valuation. This document more closely aligns with a consulting report intended for a specified audience, typically developed without any governing standards (e.g. USPAP or SSVS1) or professional credentials (e.g. ASA, CVA, ABV), guiding the performance of the work product. The authors of this report will often give a brief explanation of the practice’s performance and may assign a range of possible values. However, these reports rely heavily on the varying expertise and motives of the hired consultant. Lacking standardization, professional oversight, and a vetted process, these reports, much like the Broker’s Opinion of Value, should be viewed with skepticism due to the degree of variation in values.
Lastly, this brings us to a Business Valuation. At DDSmatch, we do not determine the value of a practice internally. Instead, we rely on trusted third-party business valuation professionals who adhere to recognized professional standards. A Business Valuation is a professional document completed by a certified practitioner which requires meeting certain performance standards established by various valuation credentialing organizations, including the American Institute of Certified Public Accountants (Statement of Standards for Valuations Services) and/or The Appraisal Foundation (Uniform Standards of Professional Appraisal Practice). Due to these professional standards, a Business Valuation offers a more reliable deliverable to practice value as compared to the aforementioned Broker’s Opinion/Evaluation, for a few reasons.
- Business valuation reports are generated with assurance that the practitioner followed well established and professionally scrutinized standards, protocols, and approaches to arrive at a value of the practice.
- Business valuation reports require the practitioner to disclose any underlying conflicts of interest, their relationship with the practice, and any other important assumptions and limiting conditions that may have influenced the final opinion of value for the practice.
- Business valuation reports will disclose the standard of value, or, in other words, will provide the specific reason for determining the value. For ordinary buy and sell purposes, the standard of value is frequently “Fair Market Value.” The intent of a Fair Market Value valuation is to determine a value that would be exchanged between a willing buyer and seller, assuming both parties possess knowledge of all relevant facts and circumstances. Without the pre-established intent of arriving at Fair Market Value, the determined value could vary significantly depending on the motive and purpose of the practitioner preparing the report. Ultimately, a Business Valuation is a document that provides expertise and authority in the eyes of any given user of the report.
The benefits you should expect by relying on a Business Valuation include:
- Provide Transparency: A Business Valuation should display financial trends, industry performance benchmarks, and strengths and weaknesses. This should all be supported by practice management reports and prepared financial statements.
- Provide Value: A Business Valuation should determine a practice value, or range of values, supportable by financial capability. Importantly, it should clearly show the methods utilized, in detail, to arrive at the final valuation conclusion. The value should be supportable by standard valuation approaches consistent with standards established by credentialing organizations.
- Practicality: A Business Valuation should provide any reader of the report with an understanding of what ownership will look like from a financial perspective, post-transaction.
- Reduce Risk: A Business Valuation should help identify areas of risk or other special qualities or characteristics of the subject practice.
- Reduce Confusion: A Business Valuation should disclose any adjustments made to the financial statements, such as removing personal expenses, discretionary family member compensation, or other non-operational expenses that are not required to operate the practice.
- Fair Market Value: A personal service business such as a dental practice is built upon relationships, and a Business Valuation should help maintain those relationships with honesty and transparency. A Fair Market Value which sets realistic expectations, paired with good faith negotiations, has been the proven pathway leading to the most successful transactional outcomes.
By separating valuation from brokerage representation, we eliminate potential conflicts of interest and provide both buyers and sellers with a valuation grounded in professional standards rather than transactional incentives. At DDSmatch, our Trusted Transition Process is built upon transparency, independence, and adherence to professional valuation standards. By utilizing qualified third-party valuation experts, we ensure that practice values are established through objective analysis rather than opinion, helping buyers and sellers move forward with clarity and confidence. As you consider the exciting and monumental step of acquiring a dental practice, a professional Business Valuation will often serve as your most reliable and trustworthy tool when determining which practice is best suited for you, both personally and financially.
Written and provide by Blue & Co., LLC
