This is another public service announcement for all the buyers out there looking at practices to purchase. This post will be short & sweet.
When a buyer is searching for practices to buy, they contact brokers to check out their listings. There’s nothing wrong with that; it’s a great way to find a practice. When you inquire about a dental practice, the broker might send you some preliminary information to provide you (the buyer) with some general info about the practice simply as an overview. Again, nothing wrong with that.
Then, when you select the practice that seems to check most of your “wants,” a broker might send you some additional information, including their practice valuation. Before you engage someone like me for buyer representation to assess the asking price, you might find it helpful to at least look over that practice valuation first to make sure it seems reasonable. I recently had a buyer engage me to help them assess the asking price and the practice’s performance. And, one of the items we always ask for is the valuation the broker may have generated to develop their asking price.
In this situation, we received the practice valuation report. As I looked over the three periods they used in their assessment (2018, 2019, and 2020), I noticed that 2020 seemed eerily similar to 2019. Then, as I focused on the numbers, it hit me; the 2020 figures were EXACTLY like 2019 numbers. At first, I thought it was either a mistake, or maybe they simply duplicated 2019 numbers as 2020 numbers and didn’t use them in their calculations. But, nope! Much to my surprise, not only did they include 2019 numbers as 2020 numbers in their calculations, but they also used a weighted average calculation and applied a weight of 3 to the 2020 numbers (2018=1, 2019=2, 2020=3). Just when I thought I’d seen it all!
The result is that they actually gave 2019 a weight of 5 compared to 2018 and a weight of 1. Understand 2019 numbers were better than 2018 and had they used 2020, which were impacted by covid, their calculated value would have been a lot less. In my opinion, this is completely absurd.
What they could have done for the third year in their calculations is normalizing 2020 to account for the covid shutdown or annualizing Jan-Aug 2021. Either one of these approaches would have been better and more reliable than simply duplicating 2019 and presenting them as 2020 financials.
So buyers, do yourself a favor and make sure you read over your practice valuation reports to make sure they appear reasonable. You never know what you may find!