One of the key issues toward a smooth transition of an associate to a practice owner is when a general dental practice is valued.  This editorial explores three basic options for the timing of practice valuations and their relative favorability to the owner and associate during the transition from associate to owner

Dunning, David G.

Dental Hypotheses

English

David G Dunning

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Associate to Owner Transition: When Should a Dental Practice be Valued?

David G. Dunning

University of Nebraska Medical Center Research: DigitalCommons@UNMC

University of Nebraska Medical Center DigitalCommons@UNMC Journal Articles: College of Dentistry College of Dentistry Fall 7-2011 Associate to owner transition: When should a dental practice be valued? David G. Dunning University of Nebraska Medical Center, ddunning@unmc.edu Follow this and additional works at: https://digitalcommons.unmc.edu/cod_articles  Part of the Dentistry Commons Recommended Citation Dunning, David G., "Associate to owner transition: When should a dental practice be valued?" (2011). Journal Articles: College of Dentistry. 7. https://digitalcommons.unmc.edu/cod_articles/7 This Article is brought to you for free and open access by the College of Dentistry at DigitalCommons@UNMC. It has been accepted for inclusion in Journal Articles: College of Dentistry by an authorized administrator of DigitalCommons@UNMC. For more information, please contact digitalcommons@unmc.edu.  بنم خدا                                                                          OPEN  ACCESS Freely Available Online      Copyright: © 2011 Dunning DG. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.  doi:10.5436/j.dehy.2011.2.00036        Associate to Owner Transition: When Should a Dental Practice be Valued?  David G. Dunning, Ph.D. Managment Advisor of Dental Hypotheses Email: ddunning@unmc.edu     Acrimonious controversy often defines the question of when a general dental practice should be valued if a new associate has a clear future intention to buy-into or buy-out the practice.  In fact, the importance of valuing a dental practice was previously identified as one of the potential “mines” in situations where associates seek to work successfully in a general dental prac-tice [1].  This editorial explores the basic options of when a dental practice should be valued in an associateship.   Obviously, other equally important and related issues arise regarding a practice valuation, including how the valuation should be determined—that is, what methods of valuation can and should be employed in isolation or in combination [2-3].  Similarly, other pivotal questions relate to the business form/entity of the dental practice [4] and how dental hy-giene income may or may not be shared with an associate who supervises dental hygiene [5].  How to value tangible assets of the practice (such as chairs and other equipment) also has to be addressed, though typically a fair market value would be determined at the time of prac-tice purchase in order to equitably estab-lish the value of tangible assets.  The pur-pose of this editorial is to focus on the when of practice valuation, especially the Editorial [Downloaded free from http://www.dentalhypotheses.com on Tuesday, February 10, 2015, IP: 137.197.85.100]  ||  Click here to download free Android applicatiojournalDunning DG                                                                                                                                                 Associate to owner transition      114    Vol 2, No 3, 2011 http://www.dentalhypotheses.com      Dental  Hypotheses intangible or goodwill assets (including a patient base and reputation), knowing that an associate intends at some future point to buy or buy-into the practice. The following diagram (Figure 1) de-picts the most commonly utilized options regarding when a practice may be valued and the relative advantage-position for the owner and for the associate. Option 1 is most advantageous for the owner.  The associate’s future revenue for the practice is included in the process of valuation—typically, 1 – 3 years after the associate begins working.  If the associate buys or buy-into the practice and aver-aged $350,000 in revenue during the pre-vious three years, then that revenue would be included in the calculations for determining practice value, along with all other practice revenue.  For example, a practice valuation without counting asso-ciate revenue might be $600,000, but with associate revenue added would likely be approximately $800,000 +/-.  Some con-sulting firms apparently value a practice in this way with the associate revenue in-cluded in the valuation formula.  Other consultants and brokers do not think it is ethically appropriate for an associate to pay for the “sweat equity” that s/he has helped to build in the practice to be pur-chased.     Option 2, a “middle” ground or com-promise position, aims to balance the in-terests of the owner and those of the asso-ciate.  The practice is valued based on his-torical performance from the previous 3 - 5 years before the associate begins work-ing in the practice while excluding the as-sociate’s future generated revenue.  In ad-dition, however, the valuation incorpo-rates the reasonably expected revenue growth of the practice or adds an infla-tionary benchmark such as the consumer price index [6].  For example, if a practice has realized an average of 5% revenue growth without an associate, then the val-uation would be calculated based on this 5% average growth for the future date/year the associate buys into the prac-tice.  Thus, an associate who buys into a practice after two years when the practice was originally valued at $600,000 would pay approximately $661,500 ($600,000 x 1.05, twice).   Alternatively, a $600,000 practice purchased after three years with a built-in inflation index of 3% would be approximately $656,000 ($600,000 x 1.03, three times).  Option 3 is clearly the most favorable approach for the associate.  The practice is valued before the associate begins work-ing for the owner and includes in the val-uation historical revenue from the previ-ous 3 - 5 years without accounting for normally expected practice growth, an in-flation index or the associate’s future rev-enue. For example, a practice is valued at $600,000 when the associate begins work-ing for the owner and then the associate  [Downloaded free from http://www.dentalhypotheses.com on Tuesday, February 10, 2015, IP: 137.197.85.100]  ||  Click here to download free Android applicatiojournalAssociate to owner transition                                                                                                                                                 Dunning DG                               http://www.dentalhypotheses.com            Vol 2, No 3, 2011    115           Dental  Hypotheses      Figure.1  From more favorable for owner to more favorable to associate.   buys or buys-into the practice after three years for the original $600,000 valuation.    Of these three options, when is the most fair, equitable, ethical option, and why?  These answers depend on the person whose opinion you seek.  It would appear that either the second or the third option is the most fair, equitable and ethical.  Op-tion two focuses on historical practice rev-enues while excluding the sweat equity of the associate.  Providing added protection of the owner’s business interests, the se-cond option also allows for some increase in practice value which may develop without an associate generating more rev-enue for the practice.  Of course, would-be and new associates in a practice typically view option 3 as the most fair, equitable and ethical option, and with good reason.  Clearly, practice growth is not a certainty, especially in difficult economic times such as the recent recession in which 10% of practices reported no revenue increase and 32%, a revenue decline [7]. In a cli-mate of flat or declining revenue, practice [Downloaded free from http://www.dentalhypotheses.com on Tuesday, February 10, 2015, IP: 137.197.85.100]  ||  Click here to download free Android applicatiojournalDunning DG                                                                                                                                                 Associate to owner transition      116    Vol 2, No 3, 2011 http://www.dentalhypotheses.com      Dental  Hypotheses value could be adjusted to reflect the prac-tice's most recent performance.  Based on my experience in assisting dental students and alumni seeking to purchase practices, the vast majority of consultants and brokers utilize some vari-ation of the second or third option.  As has been stated elsewhere, it is incredibly im-portant for the owner and the associate to discuss in detail the process of valuation, preferably deriving an actual practice val-ue, before the associate begins working [1, 8-10].   Failure to have this discussion will sig-nificantly increase the likelihood of a failed practice sale.  In fact, Dr. Heller suggests that 75 - 90% of future practice purchases by an associate will fail without a clear understanding of the practice’s value when the associate begins working [10].  Conf l i cts of  in ter ests The author declares that he has no com-peting interest.   He is a co-editor of the textbook cited in the references. He also has editorial involvement with Dental Hy-potheses.  Acknow ledgm ents This article was not financially supported by any institution or commercial sources other than the author's university. The au-thor is indebted to a number of colleagues and friends, especially Drs. Art Croft, C. Steven Wolff, Robert Madden and Eugene Heller, for teaching him about the im-portance of when practices are valued in associateship situations.  Refer ences 1. Dunning DG.  Walking with dental students through the minefields of associateship op-portunities.  Dent Hypotheses 2011; 2:83-86.  2. American Dental Association. Valuing a Practice:  A Guide for Dentists.  Edited by Domer LR and Berning R. Chicago: ADA, 2006:9.   3. Wolff CS.  Understanding practice valua-tion.  In: Dunning DG and Lange BM, edi-tors.  Dental Practice Transition:  A Practi-cal Guide to Management. New Jersey: Wiley-Blackwell, 2008;87-100. 4. Wiederman AS and Crist RL.  Business entitites.   In: Dunning DG and Lange BM, editors.  Dental Practice Transition:  A Practical Guide to Management. New Jer-sey: Wiley-Blackwell, 2008;173-194.  5. Dunning DG, Lange, BM, Madden R.  Compensating associates for supervising dental hygiene production in U.S. general dental practices:  A discussion of a fre-quently taboo topic.  Dent Hypotheses 2010; 1:85-93.  6. Hill RK, Snyder T.  Transition roundtable.  Dent Econ 2010;11;70.    7. 2008 Practice results better than expected.  The McGill Advisory 2009 24(5):4 [Ac-cessed April 20, 2011]. Available from: http://www.mcgillhillgroup.com/article_display.asp?id=328 [Downloaded free from http://www.dentalhypotheses.com on Tuesday, February 10, 2015, IP: 137.197.85.100]  ||  Click here to download free Android applicatiojournalAssociate to owner transition                                                                                                                                                 Dunning DG                               http://www.dentalhypotheses.com            Vol 2, No 3, 2011    117           Dental  Hypotheses  8. Heller EW.  Top ten reasons associateships fail. Dental Tribune 2009 [Accessed April 20, 2011]. Available from: http://www.dental-tribune.com/articles/content/id/507  9. Henry Schein Professional Practice Transi-tions, Inc.  Associateships--enhancing your odds for successful relationships.  Privately published:  2006:1-8 [Accessed April 20, 2011]. Available from:            : http://www.henryschein.com/us-en/images/dental/AEA_09YS1877B_0709.pdf    10. Heller EW.  Lecture "Becoming a Practice Owner," presented in September 2011, Univer-sity of Nebraska Medical Center College of Dentistry.                  Published:  June 30, 2011   Citation :  Dunning DG .  Associate to owner transition: When should a dental practice be valued. Dent Hypotheses 2011; 2:113-117. doi:10.5436 /j.dehy.2011. 2.00036.    This journal utilizes the LOCKSS system to create a distributed archiving system among participating li-braries and permits those libraries to create permanent archives of the journal for purposes of preservation and restoration.                                                         [Downloaded free from http://www.dentalhypotheses.com on Tuesday, February 10, 2015, IP: 137.197.85.100]  ||  Click here to download free Android applicatiojournal

Associate to owner transition: When should a dental practice be valued?

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Associate to owner transition: When should a dental practice be valued?

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University of Nebraska Medical Center Research: DigitalCommons@UNMC