Our thoughts . . . 06-21-07

PRACTICE VALUATION & ACQUISITION FINANCING

I would like to follow up on a couple of issues left over from my last article and then spend the bulk of our time discussing practice financing. Let’s first clear up any misunderstandings about the difference between the evaluation of a practice for placing it on the market for sale and a true practice appraisal, as the data collected may be very similar. For a Market Evaluation, the valuator may recommend a range of values but the ultimate decision regarding the asking price is the responsibility of the Seller. In the case of a true Appraisal, the valuator will present a document to the client specifying a dollar amount, and as a result of his or her experience and credentials would be prepared to defend that number. The appraiser might have to defend that number to a potential buyer with counsel, a financial institution or in litigation. As you might expect, this document involves considerable time and expense.

All this being said, at EMA we never forget that fair market value is still defined as what a willing buyer will pay to a willing seller when neither is under any compulsion to act and all have been advised of all information needed to make a decision. It can be a real eye-opener to potential sellers to find that in spite of the economic value their practice has for them, there may not be a ready buyer in the marketplace. Sometimes the most difficult part of the valuation process is reconfiguring a seller’s expectations. Likewise, a potential buyer may need some coaching as to how the value of a practice has been determined—and more importantly—afforded.

I’m frequently surprised at how unaware some buyers seem to be of available financing options for practice sales. I’m sure my lender colleagues who attend trade shows, speak at the schools and pay for large ads in dental journals hope that everyone is aware of their services. Apparently such is not the case. Many sellers are surprised to find that they will not have to “carry back” any significant portion of the sale. Assuming a few basic contingencies on the part of the buyer such as a good credit score, no history of bankruptcy and a little experience, they can borrow the full purchase price plus operating capital. This is in spite of having no cash and a negative net worth as a result of student loan debt. The practice must have adequate revenue to pay the overhead, service the debt (there’s that pesky “excess earnings” issue again) and provide an adequate living for the buyer. Rates are competitive and terms can be tailored to fit the situation. Local lenders may be helpful on a case-by-case basis but it is our experience that most are not interested in having too many loans in their portfolio based on the limited amount of hard assets involved in dental practice transitions. They will readily finance established dentist/customers but new buyers may have a difficult time unless a deep pockets guarantor is available and willing.

There are rare cases in which the financing may involve the seller. Very large transactions may require some seller carry-back along with situations involving a highly motivated seller and a buyer with less than ideal credit history. In these cases, the seller may have to carry the buyer long enough to get them “over the hump” and wait for a cash-out refinance. Finally, there may be rare cases where the installment sale advantages or the interest earned on the note may motivate a Seller to become the bank.

If you would like additional information about the lending/borrowing process, please do not hesitate to call our office to discuss or for a referral.

Steve Wolff, DDS
UMKC Class of 1977