We ask two experts the same question to give you two different answers on a complex issue
Question: I am hiring a new associate and plan to have him or her become my partner in two years. When should I place a value on my practice?
By Roger K. Hill, MSA, ASA
This question is critical to the success of the relationship and the new partnership. Let's consider each doctor's perspective.
The associate/partner will be concerned that if the practice is valued at the end of the associateship, his or her efforts to help grow the practice may also increase the purchase price.
The senior doctor will have two concerns about the timing of the value. First, even without the associate's efforts, the practice will likely enjoy some growth (though perhaps not as much as with the associate in place). The senior doctor will rightfully feel that if the practice is valued at the beginning of the associateship, this solo growth will be excluded. The senior doctor will also be concerned that new equipment acquired during the associateship will be excluded from the practice value.
There is a simple and even-handed way to address both doctors' legitimate concerns. Remember that the value of any practice is the sum of two components: tangible and intangible assets.
First, the tangible assets should be valued at the start of the associateship, and then updated just prior to the buy-in in order to include tangible assets acquired during the associateship.
Second, the value of intangible assets should be established at the beginning of the associateship and should be based on projected revenue that includes the expected, typical solo growth rate of the practice. (This projected growth rate is determined by measuring the average rate of increase over the preceding four to six years.) The intangible value should not be updated when the tangible assets are updated.
Thus, both doctors' concerns have been addressed. Our senior doctor has the benefit of his or her typical growth rate included in the value of the intangibles, as well as any newly acquired tangible assets. Meanwhile, our associate/partner is not penalized for his or her contribution to additional practice growth.
For more information, please contact Roger K. Hill, MSA, ASA, at (877) 306-9780 or [email protected].Question: I am hiring a new associate and plan to have him or her become my partner in two years. When should I place a value on my practice?
By Tom Snyder, DMD, MBA
We recommend that the practice's value be determined at the beginning of the employment phase. The "future" partner will not have to worry about paying for any increases in value for contributions that he will be making to grow the practice over this two-year period.
If the practice is "saturated," meaning there are sufficient patients to be transferred to the associate, then there should be a strong growth in revenue. The lost "future value" revenue that the owner may feel he is losing should be offset by the increased net profit the owner will receive from the associate's efforts during the employment phase.
All practice values consist of two classes of assets - intangible and tangible. Intangible assets include goodwill, restrictive covenant, telephone number, and location, and usually comprise about 75% of a practice's value. Tangible assets include dental and office equipment, technology, supplies, instruments, and sometimes leasehold improvements, and comprise about 25% of a practice's value.
Doing the math
When it's time to update your valuation, you'll adjust the intangible assets by the Consumer Price Index (CPI) to factor in the effect of inflation on the intangible asset value from the time of the baseline valuation. This adjustment does not result in a real increase in value, rather an acknowledgement that there is inflation in our economy. For example, $1 today does not purchase as much as $1 did one year ago. Not considering inflation results in the owner discounting the practice's intangible value from a time value of money perspective. Revaluing the tangible assets at the beginning of the partnership will include adding new purchases of equipment or technology less any additional wear and tear on existing equipment.
By setting a baseline value, you'll show your potential partner that you are trying to establish an environment where fairness will be the operative word in your relationship.
Tom Snyder, DMD, MBA is the director of transition services for The Snyder Group, a division of Henry Schein. He can be reached at (800) 988-5674 or [email protected].