Standards of Value for Dental Laboratory Valuation Experts
What the evaluator needs to know
Bruce Bryen, CPA, CVA
When a dental laboratory valuation expert is retained for the purpose of evaluating the laboratory for a transition, it is safe to assume that the standard of value to be used would be fair market value. This is because of IRS Revenue Ruling 59-60, whereby the sale is presumed to be between a hypothetical buyer and seller. The valuation expert uses the information received from the seller to prepare the valuation and then inserts the language that the format is one in which the data that is included in his or report is being prepared using the standard of value based on fair market value. A quick definition of this standard is that the highest price with the best terms negotiated—where there is no duress on either party to the transaction and each is informed about how laboratories operate and what to expect—is assumed. This is the guideline for the fair market value standard to be used for the dental laboratory upon which the report from the valuation expert is based.
What occurs if the purpose of the valuation is not for the sale of the dental laboratory but for some other reason? An expert report for some type of dissent or dispute may have a different standard that could have been set by the courts in the particular state where the valuation is being undertaken. This may alter the worth of the dental laboratory and the expert must know the standard to be used. Examples of dissent that change the fair market value standard of a dental laboratory include minority shareholder protests of value, divorce, depending upon the state, partnership disputes, damage claims, and other opposition to the use of the fair market value approach because of the circumstances.
Standards of the Valuation
Any evaluator of a dental laboratory would almost automatically assume that the fair market value standard is to be used in the event that the purpose of the valuation is for a transition to another laboratory or to an individual or group ownership of laboratories. When there is another purpose for the preparation of the valuation, the expert must be aware of its purpose, the state in which the report is being used, and whether or not a dispute is part of the background for the preparation of the valuation.
Dissenting, usually minority, owners typically are charged with different types of discounts to represent the value of their shares using a fair value standard. This is because a buyer of their interest would find that the rights they possess as less than majority owners are limited.
The fair value standard of valuation does not use these discounts but rather values the laboratory owner's minority interest without a discount. There are minority discounts based on a lack of control and lack of marketability discounts that are typically used in the preparation of the valuation for the purpose of the value of a shareholder with fewer rights than those of the majority shareholder.
The lack of marketability discounts are based on the limited number of potential buyers interested in the acquisition. When a fair value standard is used and not a fair market value standard, the major (though not only) difference is that the fair value approach does not take discounting the value of the dental laboratory into effect compared to a fair market value that does take a reduction in value for discounting. There are also adjustments for goodwill allocated to the personal asset of the laboratory owner and goodwill representing the enterprise asset value.
Preparing the Valuation Expert
At depositions, mediation conferences, or trial, opposition attorneys try to impugn the credibility of the evaluator by asking their knowledge of the law in the state in which they are testifying. It is really up to the attorneys in the case to know the law of the state; the evaluator must know the professional guidelines for his or her designation, the standard of value to be applied to the specific issue, and the premise of value, eg, such as that of a going concern.
Prior to the commencement of the valuation report, the attorney and evaluator must agree upon which standard of value is to be used for the specific purpose of the valuation. The attorneys normally prepare the evaluator for the presentation of the report in advance of the testimony. In most cases, attorneys have not had much experience in working with laboratory owners. It is up to the evaluator to assist the attorney with understanding the valuation prior to any proceeding occurring, just as the attorney must inform the evaluator of any particular law in the state that may change the standard of value to be applied by the evaluator.
In conclusion, when being retained for the purpose of evaluating a dental laboratory, the client, the attorney, and the evaluator must work together so that the purpose of the valuation is known well in advance of its preparation. The laws of the state in which the valuation is being prepared, the standard of value to be used, and the overall approach should be known prior to any services being performed.
About the Author
Bruce Bryen, CPA, CVA, is the principal in the firm of RKG Tax and Business Services, LLC, in Fort Washington, Pennsylvania.