Strategic Financial Planning for Dentists
Published on
- 07-18-2024
Read Time
- 6 minutes read
Strategic Financial Planning for Dentists
PRACTICE APPRAISALS require the collection of volumes of information in order to properly analyze and assess the value of a dental practice. It is not only important in order for the appraiser to form an opinion, but also for the potential buyer to properly evaluate if the practice is a good fit. In performing an appraisal, it is customary to incorporate three years’ worth of financial data. The most current year is the most significant and relevant, not only to a buyer candidate but also to the lender that will be financing the practice. Other information required for the appraiser review includes: accounts receivable aging report; patient demographics report; participating insurances; fee schedule; insurance write-offs; list of technologies; ADA code report by provider, production and collection reports by provider; staff list with wages and hire dates; equipment and leasehold improvement expenditures; and a copy of the office lease—if applicable.
An experienced appraiser will use two to three different methodologies in arriving at the ‘value’ of your practice. As these methodologies tend to focus on different financial aspects of the practice as the basis for the value, it is a good idea to use more than one in determining the value for purposes of determining the highest sale price. Most qualified appraisers will incorporate ‘valuation standards’ in their appraisal consistent with the Institute of Business Appraisers and/or be members of a professional valuation organization. In this respect, you will know that the standards for your appraisal meets the protocol of a professional appraisal and as such will offer further credibility to a buyer candidate.
Not every ‘appraiser’ is actually preparing an appraisal, although they may call it an appraisal. They may, in fact, be preparing a ‘report’. A report will summarize your practice information and will merely conclude on the value without using any methodology. Therefore, it is not a true appraisal. If you are paying for an ‘appraisal’, all things being equal, the end product should in fact be a true appraisal, or if you are ‘shopping’ based upon fees charged for an ‘appraisal’, you should also be aware of the differences; a true appraisal requires much more time to prepare.
Appraisals are not just for placing a practice on the market for sale, they can also be requested for future financial planning; estate planning; pre-death and disability planning; transition planning; or a practice ‘checkup’.
Financial Planning
Quite often, financial planners will request 5-10 years of projections in advance of a dentist’s goal retirement age, so that they can obtain a practice appraisal to determine the practice value and its potential impact on their ‘assets’ – sales proceeds available upon retirement. Of course, this would also require that the financial planner factor in the taxes due to determine the net after-tax sales proceeds. Sometimes, the practice value is a considerable asset as part of a dentist’s overall financial plan.
Estate Planning
Many times, an attorney engaging in estate planning services will also request the appraisal of a dental practice. This is an example of the absolute case wherein a factual ‘appraisal’ needs to be done and not simply a ‘report’, as all values in an estate have to withstand the scrutiny of the IRS, as all federal estate tax returns are audited. The value of the practice will help the attorney determine how to ‘split’ the value of the assets of the estate between spouses to equalize the assets and minimize estate taxes.
Pre-death & Disability Planning
It is highly recommended that once a dentist turns 50, they consider pre-death and pre-disability planning, which would require a current appraisal of the practice followed by annual tax returns provided to the appraiser at the end of every year. These documents should be stored by the appraiser for ‘immediate access’ to quickly reassess the value when the time comes to place the practice on the market. This is necessary due to the rapid decline of a practice value when a dentist is suddenly disabled or unexpectedly dies. In connection with a pre-death and pre-disability plan, there may also be a directive in place notifying the spouse of the dentist, the appraiser and the broker to contact one another to expedite the marketing of the practice.
In determining what the dentist’s options are for transitioning, a dentist should consult with a transition consultant 5-10 years in advance so that they may first educate themselves on the different options and secondly, determine what options exist within the dynamics of their particular practice. In order for the consultant to make this determination, an appraisal will have to be completed.
Financial Planning
It is a good idea to get a ‘checkup’ for your practice, by having appraisal done five years in advance of your goal retirement date. This leeway affords you the opportunity to clean up your financial information, if necessary. The appraiser will also advise you as to what the strengths and weaknesses of your practice are in general; review your overhead and advise you on where you stand on these overhead items in comparison to ‘normal’ overhead ranges; provide direction on technology to consider and also technology/updates ‘not to consider’ depending upon the time frame of your retirement; and also, possible recommendations on your facility. This allows you, then, to consider and take action or corrective measures prior to your practice going on the market, and, in the end, maximize not only the ‘value’ of your practice but also the marketability.
The benefits and knowledge gained from an appraisal clearly outweigh the cost and should be considered by dentists in many contexts other than simply at the time that they are ready to place their practice on the market.