Any business is made up of both tangible assets (those that you can see and touch, like equipment, fit-out and furniture) and intangible assets (like goodwill, brand recognition and intellectual property).
There are many misconceptions about how these different asset classes should be treated in a business valuation and sale. To address these misconceptions, we have put together and answered some frequently asked questions that we get as prolific dental practice brokers:
FAQ 1: Why do some business valuations not value fit-out, equipment and goodwill separately?
A1:
While some may think that any asset is worth the sum of its parts, this is not always the case with a business, for two main reasons.
1. A business is usually worth what it is worth based upon it’s perceived financial prospects.
The fit-out and equipment will of course make a difference in how attractive the business is to a buyer. A stylish, modern practice will attract a premium and the reinvestment that is needed in an older practice will be taken into account in the price that someone will pay.
HOWEVER, the value of the fitout and equipment alone will almost never be the primary driver of the price paid for an established business.
Prospective buyers of a business will usually base their decision to purchase and the price that they will pay primarily upon the business’s perceived ability to generate income for the owner, and not the quantity and quality of the equipment and fitout.
A bank looking at financing the purchase of a practice will likewise base its decision on the likelihood that the purchaser will be able to repay the loan from the practice’s turnover and profit, rather than how well fit-out and equipped the practice is.
2. The value of the component parts independently is very different to their value as part of a whole.
The fit-out, equipment and goodwill of a business can be very valuable together because of their ability to make money, and not at all valuable apart… because:
- The custom nature of business fitout makes it inappropriate for use anywhere else.
- It is difficult and expensive to move dental chairs and X-ray equipment. This cost and hassle to move means that they are usually worth more to someone in situ than if they were sold separately to be moved
- It is hard to predict a business’ ability to move goodwill away from its current location - with this lack of predictability comes risk.
- The lack of a robust, transparent second-hand market for equipment means that it is hard to find a reliable way to price it.
- Very old equipment that people are still able to use to generate income in a practice is worth something to the owner and NOTHING on the open market.
FAQ 2: Do I need an equipment valuation to apportion the sale price in a practice sale contract?
A2: We should start this answer by providing some background.
The apportionment of the price paid for a practice between fit-out, equipment and goodwill can mean very different tax outcomes for the buyer and seller and, as such, buyers and sellers will often want to apportion the purchase price differently in the contract when a practice is sold.
Typically:
- The purchaser will want to have more of the price allocated to equipment and fit-out, so they can later depreciate post sale and get a tax write-off.
- The vendor will want to have more of the price allocated to goodwill to avail themselves of potential CGT concessions, with the potential of paying less tax.
Agreeing to an apportionment of price in the sale contract usually ends with a compromise between the two parties, whereby neither gets an optimal outcome for themselves.
This doesn’t have to be the case though. It is possible to leave the sales price unallocated in the contract, so that both parties are able to allocate the price post sale independently of each other.
The Australian Taxation Office (ATO) has advised that in the absence of an agreement on apportionment in the sale contract, “each party would generally have regard to and be able to justify their reasonable apportionment based on the relevant value of the separate assets at the time of the making of the contract”.
This means that the buyer and vendor are both independently able to apportion the sale price how they see fit, even if they don’t agree with each other, as long as they have a justifiable rationale for how they have done so.
To answer the question succinctly:
You can apportion the price between equipment and goodwill in a practice sale agreement, but you do not need to do so. Sometimes (too often) having apportionment can lead to a sub-optimal tax outcome for all involved.
FAQ 3: Does this mean that I don’t ever need an equipment appraisal
A3. No – all we are saying is that you don’t need a separate equipment appraisal when you are valuing your practice as part of a whole appraisal . There are reasons why you might need an appraisal for other reasons. For example:
1. While you may not need an equipment appraisal for the sale contract, you may need one to apportion the sale price afterwards for accounting/tax purposes. This appraisal can be done via several different methods, like:
- A quantity surveyor or industry specialist
- The depreciated book value of the equipment
Each methodology will give you a different outcome – you should ask your accountant which is best to employ for your purposes.
2. Insurance purposes
3. Refinancing
If you enjoyed this article you might enjoy these other articles we have on practice valuation: