Orthodontic Practice Appraisals are the first step in determining the valuation used for a 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.
What is a Practice Appraisal?
The Practice Appraisal (also known as a Practice Valuation) is an independent assessment of the current Fair Market Value of an orthodontic practice. The Practice Appraisal is an essential component of every type of Practice Transition (Associateships, 100% Sales, Fractional Sales, etc.), because it establishes the financial realities of the practice, and any viable transition plan must be supported by the financial realities of the practice. The Practice Appraisal, therefore, is the first step in the Practice Transition process.
Are Practice Appraisals beneficial for Estate Planning ?
Practice Appraisals are also useful for estate and retirement planning purposes. Maintaining documentation of your practice’s current value is essential for transitions in the event of death or disability when time is of the essence. Practice Appraisals can also be performed to assist in locating potential Buyers as part of the pre-planning stages for an eventual Practice Transition.
Determining a fair valuation of an Orthodontic Practice
When it comes to determining a practice valuation, 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.
What is the Practice Appraisal cost and how long an Appraisal valid?
Our fee for the Practice Appraisal is $7,500. This includes the determination of Fair Market Value and Tax Allocation, as well as two (2) annual updates. Usually, the Appraisal is valid for up to one (1) year from the date of completion, so our fee provides a current accurate valuation for up to three (3) years from the original date of Appraisal.
Is an onsite visit required for the Practice Appraisal?
An onsite visit is not required when performing the Practice Appraisal for your Ortho Practice. 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.
Frequently Asked Questions for Valuation & Appraisals
The one thing that is unique to the orthodontic specialty and is not present in any other dental specialty is that the patients require a continuum of treatment. Orthodontic care is performed over time and billed per a patient contract. At any point in time, there is a total amount remaining to be billed, an amount currently due and potentially amounts past due. The collective value of those future payments are known as the Contracts Receivable – “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.”
The Contracts Receivable are the largest asset being sold, so when determining the value of an Orthodontic Practice, it is essential to value that asset properly. An expected ratio exists between the amount of Contracts Receivable and the Gross Collections of an orthodontic practice, which varies based on the practice’s particular billing schedule. Proper analysis of the Contracts Receivable, Gross Collections and patient billing schedule also help us identify if the Seller has pre-collected patient fees and to what extent that affects the Fair Market Value of the practice.
Some of the data we need to perform an Appraisal includes:
- Practice Tax Returns for the Previous 2 Years
- Profit & Loss Statements for Year-to-Date and Previous 2 Years
- Statement of Adjusted Net Income
- Aging Report for All Current Active Patients
- Inventories of:
- Office Furniture & Equipment
- Dental Equipment
- Dental Supplies & Instruments
- Office Supplies
- Interior & Exterior Photographs
- Staff Census
- And More
From the time we receive all of the necessary information, we will have a completed Appraisal out for the owner’s review within 2-3 weeks.
It is important to have an independent party determine the Fair Market Value of the practice so that there is no risk of bias on the part of the Appraiser. Furthermore, it is essential that the Appraisal be familiar with and have expertise in the valuation of an orthodontic practice. Your accountant most likely knows your practice financials very well, but he/she has probably not appraised many orthodontic practices and therefore lacks that crucial experience and expertise.