First Step in Transitioning: Understanding Formal Valuation vs. Opinion of Value
Transitioning your dental practice can often feel like an overwhelming challenge, especially when taking the crucial first step. Many dentists face this inevitable phase of their professional journey with hesitation, driven by a lack of trust, insufficient knowledge of the process and economics, and general anxiety about the future. Traditional advice suggests selling your practice through a formal valuation or finding an associate doctor as the initial move. However, these methods can often lead to wasted time and energy. Being well-prepared and informed is essential for ensuring a smooth transition that benefits not only you but also your staff and patients.
Formal Valuation vs. Opinion of Value
Knowing whether you need a formal valuation, or opinion of value analysis isn’t always straightforward. “Formal valuation” and “opinion of value” are distinct terms and not interchangeable.
What is an Opinion of Value?
An opinion of value estimates the amount for which a dental practice can be bought or sold. This approach offers flexibility, accounting for unique aspects of the practice and market forces that traditional valuations might overlook. When provided by a reliable source, it is market-driven and effective. Factors such as buyer demand, population density, leasehold improvements, equipment, value-added procedures, staff, and post-closing work schedules significantly impact these evaluations.
When Should You Use an Opinion of Value?
- Preliminary Interest: If you are initially gauging interest and not yet fully committed to selling, a less formal assessment might suffice.
- Highly Desirable Practice: When your practice is highly desirable to buyers and multiple offers and a competitive environment are expected.
- Replacement Cost is Higher Traditional Valuation Metrics: When the replacement cost of practice is higher than a valuation based solely on profitability.
What is a Formal Valuation?
A formal valuation is a certified assessment of a dental practice’s value, conducted by a qualified professional following established standards. It requires specific documentation and provides a credible, defendable figure.
When Should You Use a Formal Valuation?
- Multiple-Unit Sale: When dealing with a sale involving multiple units with significant assets and revenue.
- Legal or Lending Requirements: When precise and defendable numbers are needed to satisfy legal or lending requirements.
- Partnerships and Buyouts: When parties require a neutral, third-party starting point for negotiations. Often used in partnership sales where a future valuation method needs to be documented.
Key Considerations in Dental Practice Valuation
- Lender Requirements: In dental-specific transactions, a formal valuation is rarely required by lenders. Their primary concern is whether the cash flow after adjustments can support the loan amount.
- Time Sensitivity: The value of the practice is defined only at a specific point in time. A valuation prepared a few months or years ago may not reflect the current value. The last 18 months is typically the most important time frame used to determine value.
- Market Conditions and Staffing: Changes in revenue, expenses, market conditions, and staffing can significantly impact the valuation.
How JRA Can Help
At JRA, we understand the complexities and emotions involved in transitioning your dental practice. By taking the right first step and understanding the factors that impact your practice’s worth, you can transition with confidence and peace of mind. Your preparation and education are crucial to achieving a smooth and successful transition, ensuring that you, your staff, and your patients are well taken care of.