The Practice Appraisal is the first step of an Orthodontic Practice Transition, but is also necessary for other reasons. Practice Appraisals can be performed to facilitate a Practice Listing, as well as to determine the value of a practice in advance for purposes of establishing the sales price.
We place more importance on the amount of Contracts Receivable that most appraisers. Contracts Receivable are defined as, “monies to be billed in the future, for work to be done in the future, in order to complete treatment on all current, active patients.” This is the single most important distinction in an orthodontic practice compared to other professional practices (visit our Learning Center to learn more about the importance of Contracts Receivable). An expected ratio exists between the amount of Contracts Receivable and the Fair Market Value of an orthodontic practice. In addition, the Contracts Receivable balance tells us if the Seller has pre-collected too many fees.
Our fee for the Practice Appraisal is $7,500. This includes the determination of Fair Market Value and Tax Allocation. Usually, the Appraisal is valid up to one (1) year from the date of completion. If updates are needed in the future, we will apply a credit toward the new Appraisal fee. That credit will be equal to the original amount paid.
Note: An onsite visit is not required when performing the Practice Appraisal. If, however, you would prefer we conduct an onsite Appraisal, there is an additional fee of $5,000 plus airfare and hotel accommodations for the duration of the trip.
There are two types of sales (100% Sales and Fractional Sales) and they each have different reasons for occurring as well as a different set of ideal conditions under which they occur.
When selling 100% of the practice, the Seller is ready to stop practicing in the near-future (0-2 years) and retire. The best time to sell 100% of the practice is after the Seller has mentally committed to retirement, but before the practice has slowed production. Once you have made the decision that you’re ready to step away from your practice, it’s time to start the process of selling 100%.
The reason for selling a fractional interest in the practice is either because the practice has grown so large that it needs an additional doctor or the Seller wants to retire within the next 5-7 years, but has a Buyer in mind now. Fractional sales require the practice to be of a minimum size ($1.5m+) and the larger the practice is, the less likely it will be that a Buyer can afford to purchase 100% in a single transaction, therefore, the only way to sell would be to sell fractionally over time.
The single biggest killer of practice value is a reduction in production. It is common for orthodontists to begin to take more time off as retirement draws near. The result is a drop in income, a drop in patient starts, possibly less money and effort is put into marketing. This can continue for years before the orthodontist finally commits to retirement, but by then the damage is done.
The way to maximize the value of your practice is to have a clear vision as you approach retirement age and before you start acting on that desire to take more time off, formulate a transition plan that starts now and ends with retirement. Do not wait for production to fall and neglect to take root, think about when you would be ready to walk away and plan a path forward that includes running the practice at full strength through the sale.
There are many financial documents and internal reports we will need to appraise the practice, which is the first step in any transition. Make sure you have clean and thorough Profit & Loss Statements for the previous 2 years and year-to-date. Make sure your Aging Reports are current, accurate and don’t contain old patient data that is uncollectible. Prepare a list of all the patients who are paid in full, but who have some treatment remaining and estimate how long it will take to complete their treatment.
Lastly, prepare good inventories of Dental Equipment, Office Furniture & Equipment, Dental Supplies & Instruments and Office Supplies. The furniture and equipment inventories should include their approximate age and value (please note whether the value given is a current estimate or the original purchase price – either are acceptable).
The decision to sell to another orthodontist or to a DSO is personal and nuanced. However, in general, private sales to fellow orthodontists result in a cleaner transition from practice into retirement, more total value across the entire transition and are better for the orthodontic industry.
DSOs typically require the Seller to work as an employee for several years after the sale and for a salary that is considerably less than what the orthodontist made as the owner. The effect of that reduced salary is that the Seller essentially gives his/her practice away. If you sell your practice for $1m, but then have to work for 3 years at a salary that is $200k less than you made as an owner, you are losing $600k over those 3 years, plus the difference in value from the practice at the time of sale vs. 3 years later. Instead of selling your practice for $1m, you sold it for less than $400k!
Ziegler Practice Transitions was founded by orthodontists for orthodontists. We have extensive experience in the practice of orthodontics, as well as orthodontic practice transitions. We prefer to work with both the Buyer and Seller to quickly identify their individual goals and together, design a transition plan that best accomplishes those goals. Starting from a fair and neutral position, we then educate the parties as to the effects and consequences of their suggested modifications so that they can make informed decisions for themselves, rather than taking blind advice from an advisor. The result is both parties fully understanding all aspects of the transition that they helped create.
Whether you need help with Practice Appraisals, Associateships, 100% Sales or Fractional Sales, we are ready to guide you through the process and assist you in accomplishing your goals.