We ask two experts the same question on a complex issue.
Question: How important is it for a potential buyer to evaluate a practice’s existing dental equipment before buying a practice?
Before purchasing a dental practice, you may want to make sure you actually get what you’re paying for. A professional appraisal is recommended, delving into everything from financial and operational reports to tangible assets.
One of the largest tangible assets is probably the dental equipment in the practice. The value of those assets to some extent depends on what you’re willing to pay for used equipment. Used dental equipment has value to you only if you need it in your new practice. Is the equipment up-to-date and fully functional? Does it support the services you will be providing? If so, you may consider it a positive asset with real value.
But if the practice you want to purchase has equipment that is not compatible with your services or is out of date, then it might be considered a negative asset, particularly if it has little market value and costs you money to have it removed.
Here are three critical steps to take for evaluating in-office equipment before completing a practice purchase:
- Understand before initiating your practice search exactly what equipment you need to operate effectively in the practice.
- Consider hiring an equipment appraiser to conduct a full inventory of the available practice. Be sure the appraisal:
- 3. Identify equipment you will keep versus items you will liquidate; then determine liquidation and replacement costs.
• Divide your list into “must-have” and “nice-to-have” equipment.
• Get estimated costs for each item.
• Indicates still-useful equipment versus outdated items
• Assigns value to each piece of equipment
Now, you can more accurately factor the potential costs for updating existing equipment into the practice purchase negotiations to fully meet your needs.
Jayson Foley is the South Central region business development manager for Wells Fargo Practice Finance. He helps doctors navigate the transition into ownership or expand their practices. With more than 12 years of industry experience, Jayson prides himself on being a resource for his doctors throughout their professional careers.
KEN RUBIN, CPA, PFS
A buyer should have a detailed inspection performed by a professional in order to assess the working condition and expected remaining lifetime of the existing equipment. This is no different than having an experienced car mechanic inspect a used car before buying it.
Even though many dental equipment and supply companies will gladly perform free inspections upon request (with the hope that the buyer will become a future loyal customer), it is amazing how few buyers actually do a pre-purchase equipment inspection. Independent equipment repair companies will also perform a more thorough inspection, for a fee.
Post-inspection, a buyer is now well informed and can submit a request for repairs (RFR) to the seller. If the seller elects not to make the repairs or replacements, the sales price can be negotiated downward relatively easily.
Sellers have a common misconception that if they recently made big equipment purchases, such as CAD/CAM or 3-D cone beam, the value of their practices will automatically increase. This seems like a reasonable assumption, but it’s no longer the case in today’s dental world. Being a longtime dental CPA, business advisor, and practice broker, I have a unique perspective. The recession of 2008 and the flurry of dental practice foreclosures changed that.
Lenders used to be “asset-based” and “gross revenue-based,” but have now shifted to being “cash flow-based.” They really don’t care much about the annual production and collections or the expensive equipment in an office. The number one practice valuation factor nowadays is the cash flow coming out of the practice.1 Cash is king!
1. Rubin K. How to really value a dental practice. Dental Economics magazine. Volume 106, No. 7.
Ken Rubin, CPA, PFS, is the cofounder of the Academy of Dental CPAs (ADCPA). 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.