First, let's qualify what a merger is. A merger occurs when on practice buys another and "merges" them into one.

It is generally agreed that a merger is the fastest, most reliable way to jump-start a practice. If you're really serious about practice growth, a merger might be exactly right for you. Of course, it means careful planning in order to effect a smooth transition, and you may need the services of a broker/consultant to aid you.

I have heard experts say they have never known one to fail! While that's something that no one can guarantee, it does give you an idea of how successful they can be.

A merger has as one of its components the sale of a practice. But what value do we place on this practice being sold? The answer, in my opinion, is fair-market value. Why should the seller accept anything less?

Typically, because the buying practice has little or no need for the hard assets (for example, equipment, furniture, etc.), they feel that they shouldn't pay for the practice, but rather for the records.

Let's examine this thinking.

What is it that you buy when you buy a practice?

You're really buying an opportunity to earn a living, to earn money. This is mainly accomplished through the goodwill that has been created by the seller over the years of the practice. This goodwill is what creates a steady stream of people to come through the door and agree to pay for dental services rendered.

Typically, the hard assets of a mature practice have been depreciated to zero and have little intrinsic value. True, if you need to use these assets to produce dentistry, they have value. But to offer them for sale in the marketplace creates a different scenario.

So, when you buy a practice and merge it into yours, what value does it have?

As a buyer, you get the goodwill and the stream of patients representing money and a return on your investment. These patients would not otherwise be in your office. In fact, because some overhead items are fixed, the merger creates a better return on investment than if you practiced in the old facility and used the hard assets!

Because your profit is better does this mean you should pay more when you merge than when you don't? Absolutely not! But it does mean you ought not pay less than fair-market value.

The question then arises, "What should I do with the equipment?" If you need the depreciation, ask your accountant to advise. If you don't need the depreciation, call in your friendly sales rep, get an appraisal, and either sell it or gift it to a charity.

The most valuable part of a dental sale is the goodwill that has been generated over the years that is transferred to the buyer. This goodwill is the engine that generates patients - and thus profits - which is the sole purpose of buying any practice/business.

If we can agree to this, then it becomes obvious that a merger sale is valued exactly as any other sale - no more, no less - at a price that's fair to the buyer and the seller.

Published in Dental Economics, May 2000.
Robert J. Mallin, DDS, CFP.