Asked Questions

The IRS defined Fair Market Value in Revenue Ruling 59-60 as follows: “The amount at which property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.”

This or a variation thereof is the most often used definition of fair market value. It is the most frequently used premise of value when a practice is valued and the practice’s purchase price is determined.

Have a comprehensive and thorough practice valuation conducted in order to establish a benchmark and determine ways to make your practice more profitable and valuable. Then take the time to get your practice and facility in the best financial and operational shape possible.

Great practices, with great facilities, in great locations still sell at a premium. However, we do not recommend that you spend a significant amount of money to upgrade your facility and equipment soon before you sell your practice because you may not recoup all of your investment when the practice is sold.

For your convenience, we have partnered with several large practice management software companies to provide step-by-step instructions to extract the data required to prepare a comprehensive practice valuation.

A visit to the practice enables Bentson Clark & Copple to obtain a clearer understanding of the practice and its value to potential buyers. During the office visit, we can observe the facility and its layout, condition of the equipment, signage, staff, patient traffic, office atmosphere, and the location of the practice within the town, etc.

The physical visit helps identify critical intangible factors of the practice that cannot be obtained by simply reviewing financial statements and operational statistics. In addition, the visit allows us to more easily market the practice to potential candidates.

The best way to determine the value of a practice is through a properly performed on-site practice valuation. (See the FAQ above regarding why an on-site practice visit is most appropriate in preparing a practice valuation.)

To accurately prepare the valuation report, we inquire about the doctor’s personal information and general information about the practice including the staff, hours of operation, leasing arrangements, number of locations and referral sources, among other items. We review statistical and operational information, such as the practice’s fees, the number of case starts and completions, contracts receivable balance, the number of active and recall patients and the number of active patients that are paid in full. 

We also review and analyze the past three years of tax returns, profit and loss statements, a current balance sheet, the fixed asset listing and all year-to-date financial information. Adjustments to the historical financial statements are presented and explained in order to provide an accurate picture of the true profitability of the practice. Because the value of an orthodontic practice is largely dependent on the amount of income accruing to the owner-doctor, this financial analysis is crucial to the valuation report.

Once all of the information has been received and the practice has been visited, a draft valuation is produced for review by the owner-doctor. The report explains the various general valuation approaches and the valuation approach used by Bentson Clark & Copple and includes information about the doctor, the practice, local demographics and the orthodontic industry. The valuation report provides a clear picture of the practice and its financial health and justifies the calculated value.

Many buyers, sellers, and even advisors rely on rules of thumb to determine a purchase price. Examples include a percentage of annual collections or a multiple of pre-tax net income to the owner/doctor, among many others. While helpful to ensure that a purchase price is within an acceptable range, rules of thumb are only averages and should not be solely relied upon when determining the purchase price. For example, the average purchase price as a percentage of annual collections may be around 75%. However, actual prices range from less than 50% of collections to over 90% of collections. This is a significant range of possible values, and either party could receive a bad deal if a simple average of 75% of collections is used.

An appropriately prepared valuation will take various factors into account to properly value the practice, such as location, competition, growth trends, level of contracts receivable, condition of the office and equipment, staff, internal systems, external referral patterns, and many other items. A valuation will also properly calculate the practice’s true operating income to determine the real economic benefit (i.e., income) accruing to the owner/doctor, which also largely determines the value of the practice.

Finding and matching prospective buyers/sellers, performing valuations on the practice, constructing equitable purchase/sale scenarios for both parties, conducting negotiations, drafting proper documents and setting in motion arrangements are all part of the transition process.

It is recommended that you allow at least four to six months to construct all cash flow analyses, negotiate the terms of the deal, construct the letter of intent and employment agreement, and develop definitive legal documents. Achieving this time frame is possible, particularly if the respective parties’ advisors keep open lines of communication with each other. It can be a remarkably smooth process, or it can be rocky, depending on the advisors and the level of communication.

An associate is an employee who has the intention of proceeding forward with the senior doctor through partnership, buy-in or buy-out. The association period usually lasts approximately three to twenty-four months depending on mutual agreement. Some advisors and sellers wish to waive the association period in order to move directly into the buy-in/buy-out.

In a partnership agreement, Bentson Clark & Copple highly recommends that an association period last at least six months in order to truly see how the partnership will work. This time frame will allow the staff and community to accept the partnership and to see if the physical facility can adequately accommodate multiple doctors. This is true even in cases in which a child is going into practice with a parent. If it does not appear to be working well at the six month mark, it is likely that no length of time will alter that fact.

These are the comprehensive legal documents that incorporate all the significant aspects of the purchase agreement. Some of the various components might include: employment agreement, stock or asset purchase and sale agreement, promissory note and amortization schedule, pledge agreement, personal guaranty, assignment of life insurance policy as collateral, assignment of disability insurance policy as collateral, assignment of personal goodwill and covenant not to compete agreement, deferred compensation agreement, and/or shareholders’ agreement or partnership agreement (for partnerships).

Bentson Clark & Copple LLC is not a law firm and cannot provide legal services or legal advice to clients. However, Bentson Clark & Copple can work with your local attorney or refer you to an attorney who is experienced in practice transitions.

If the seller is incorporated and wishes to sell his or her practice, he/she may do so either by selling his or her shares of stock in his or her corporation, or by selling the assets of the corporation. Typically, sellers wish to sell their stock, as any gains from the sale of stock are taxed at capital gains rates. Buyers, on the other hand, dislike stock sales because they would remain liable for any debts of the corporation. Any amounts paid for stock are not deductible for tax purposes.

Nearly all buy-outs (sale of 100% of a practice) are asset sales rather than stock sales. Most partnership transactions are not entirely asset sales or stock sales, but some form of hybrid structure that serves to allocate the purchase price consideration to several possibilities. This will allow the parties to work toward an equitable and mutually agreeable sharing of the tax burdens associated with such transitions.

This is a practice transition structure where the buyer purchases the tangible and intangible assets of the seller’s practice rather than the capital stock of the seller’s corporation. Buyers typically prefer this type of structure because they will be able to write off/depreciate the purchase price over a period of time. They can identify the liabilities they will assume, if any, versus a stock sale. Within a stock sale, a buyer purchases the stock of the seller’s corporation, and any existing known or unknown liabilities remain in the corporation purchased by the buyer, and thus the buyer assumes all liabilities.

Tangible Assets

Tangible assets are those that have physical properties, such as furnishings, fixtures, equipment, supplies and the like.

Intangible Assets 

Intangible assets have no physical properties or characteristics, such as patient records, patient lists and databases, operational systems, workforce, and corporate and/or personal goodwill. Intangible assets are generally amortized (or written off for tax purposes) over a 15-year period.

The cash flow analysis is extremely important to both the buyer and seller because it provides an estimation of the financial impact to both parties assuming the agreed upon purchase price, repayment schedule, days worked and projected collections and expense levels.

The buyer will want to have these prepared to ensure that he/she can afford the practice while still earning enough to make a reasonable living based on the proposed terms of the transaction. The cash flows should illustrate to both parties whether or not the transaction is financially viable.

This is a non-binding document that outlines all major terms of a transition, including but not limited to: purchase price, purchase price allocation, items to be purchased, payment terms, salary parity, days worked, length of association (if any) and the related salary. Bentson Clark & Copple believes that this document is an essential and important part in any transition.

If agreement on the major points cannot be reached by the various parties involved, it usually becomes apparent during the LOI stage. The LOI sets the stage for the smooth development of the more complex definitive documents. Note: The terms LOI and term sheet are interchangeable.

A right of first refusal grants the buyer a right to purchase, which is exercisable only in the event that the seller elects to sell property, and only upon the terms of an offer actually received by the seller from a third party.

Not necessarily. Contracts can be written to allow you to continue to practice as many days and/or as long as you desire. Selling all or a portion of your practice simply allows you to receive some equity out of this most valuable asset, your practice. After selling your practice, you may also have the opportunity to work for other practices (outside of the non-competition area) on a per diem or salary basis.

Bentson Clark & Copple’s practice location services are free to residents. If you choose to use Bentson Clark & Copple on a consulting basis to review a pre-existing practice valuation or to evaluate the merit of any particular practice or opportunity, you would incur charges on an hourly basis.

If the buyer locates a seller who is willing to have Bentson Clark & Copple conduct a valuation, generally the seller pays for the valuation. However, in rare cases, if the seller is uncertain of transition, the buyer may then be asked to share in the costs associated with the necessary services performed. In these cases, the costs can be incorporated into the purchase price and loan.

Bentson Clark & Copple are aware of practice opportunities throughout the United States. The majority of opportunities are from doctors who have contacted us directly, or they are clients with whom we have previously worked and who have decided to pursue a partner and/or buyer.

We have a very strong relationship with the American Association of Orthodontists and with consultants within the orthodontic industry. Doctors are often referred to us through those sources. We are also aware of many practices in which doctors would like their opportunities to remain anonymous. There is sometimes a fear of competing orthodontists and referring doctors within their community finding out about the practice's situation; leading to rumors and reduced referrals and patient starts.

Many of the practice opportunities we represent are practices for which we have performed a comprehensive practice valuation and have personally visited. Therefore, we have a thorough understanding of the financial and operational aspects of the practice.

Generally – No. There are too many intangible factors in the operational sections of any practice that can easily be overlooked without a thorough valuation. Some sellers do not want to have a valuation done and simply set a purchase price. However, when this occurs, the buyer’s due diligence process and the overall transition negotiations usually take longer (and cost more), since much information must be gathered and analyzed to determine a reasonable purchase price for the practice.

Commercial lending and seller financing are the two most common forms of financing. In larger practices, it is not uncommon for a combination of these forms to occur. Bentson Clark & Copple has excellent relationships with lending institutions in the dental community that understand the specialty. With these specialized financing institutions, it is not uncommon for the buyer to obtain 100% financing.

Please visit our Practice Financing Page for more information.

Equitable negotiations, longer transition time frames, proper planning, and shorter association periods can make even “high dollar” practices affordable. You may pay more initially, but your future income will be greater. Do not be afraid to consider practices valued at one million dollars or more. If the practice is valued properly, the practice’s net income will justify the higher price and allow the buyer to repay the purchase obligation over a reasonable period of time. (Remember: The value of a practice is primarily based on the net income or economic benefit it produces for its owner. Generally speaking, the more profitable a practice is, the higher the purchase price.)