We ask two experts the same question on a complex issue.
I’m considering buying a practice. The seller is a general dentist who places her own implants. I don’t place implants. Can I ask for a lower valuation based on that special service that she offers?
KEN RUBIN, CPA, PFS
This is an excellent question, and the answer depends on several factors. First, understand that a buyer can always ask for a discount for any reason, whether it’s valid or not, and the seller has three options—accept, counter, or reject the offer.
In 2003, Dr. Charles Blair shared a prediction at an Academy of Dental CPAs conference. He said implants would become the new standard of care in dentistry. He was right, and the placement of implants by general practitioners has become much more common and less of a special service or unusual procedure for GPs.
It is common to discount the practice value for special services not usually performed by GPs in the particular geographical location of a practice. The reason for the discount is due to the high likelihood that the revenue currently generated for the special service will not continue for the buyer. Throughout the country, the special services performed in GP practices are universally discounted for TMJ, hard-wire ortho, and high-volume sleep apnea.
Here in Southern California, where trends often start, it has become typical for GPs to place implants, and therefore the implant placement revenue is commonly factored into the practice valuation calculation.
People will not get what they do not ask for. It would be wise for you as a potential buyer who does not place implants to ask for a discount. If the practice is “For sale by owner,” there is a good chance that you will be able to receive a discount.
If the practice is being sold through a broker, the broker will explain to the seller that there are plenty of GP buyers nowadays who place implants, and that they might be willing to buy the practice without expecting a discount.
ALLEN SCHIFF, CPA, CFE
As a dental CPA, I am often called upon to assist with dental practice transitions. Your particular issue seems to happen often when a prospective buyer who wants to acquire a dental practice engages us.
As you know, the value of a dental practice is predicated upon the buyer being able to maintain the top line of the practice he or she is acquiring. The top line is the annual collected fees of the dental practice. One of the methodologies many dental CPAs use to value a dental practice is based on annual collected revenues.
So the issue is that the seller is a general dentist who places her own implants and you don’t place implants. You want to know if you can ask for a lower valuation.
If you look at your dilemma from the buyer’s perspective, you can conclude that the practice valuation should be reduced.
The seller will acknowledge that the buyer will lose revenue due to the buyer’s inability to place implants. However, sellers are reluctant to reduce the value of their practices because they have a lot of pride in building their practices and they want the value they perceive.
For you from the buyer’s viewpoint, although you will lose the initial value from the inability to place dental implants, you and other young dentists are so well trained today that you can keep other professional services in house, such as simple endo or extractions. These types of procedures often offset the loss of revenue from the inability to place dental implants.
As you can see, there are two points of view on this issue, and both can be easily understood. Before concluding that this practice is not for you due to the implant issue, consider the location of the practice, culture of the practice, and whether or not the practice participates with dental insurance. The potential of these could far outweigh the implant issue. Consult with your dental CPA before making a final decision.
Ken Rubin, CPA, PFS, is the cofounder of the Academy of Dental CPAs. His CPA and business advisory firm, Ken Rubin & Company Dental CPAs, helps dentists with practical and proactive advice. Reach him at [email protected], or visit californiadentalcpas.com.
Allen Schiff, CPA, CFE, is a founding member of the Academy of Dental CPAs. This group of very knowledgeable CPA firms specializes in practice management services for the dental industry. He serves on the ADCPA executive committee and is the chairperson of the ADCPA marketing committee. Reach him at (410) 321-7707 or [email protected].