Dental practices are unique and the valuation methodologies employed for other types of businesses may not apply to your practice. You need a professional with evaluation-based expertise in your industry to ensure you receive what your practice is worth.
A typical practice has 80% to 85% of its value in intangible assets like loyal patients, office reputation, and trademarks and patents. These intangibles are difficult to put a number on, but they add significantly to your practice market value.
Location
If you’re considering selling your dental practice, knowing its current value is critical. Without this information, you run the risk of overpaying or underpaying for what took you years and lots of blood, sweat and tears to build.
There are several ways to determine the fair market value of a dental practice for sale, including an asset-based, market comparison or income-based approach. The most common method is an income-based valuation based on capitalized earnings or discounted cash flow.
A qualified professional can walk you through the entire process and help you determine an accurate value for your business.
Practice Size
There are a few different ways to appraise a dental practice. A few of these include an asset-based, market comparison or income-based approach.
The asset-based valuation method looks at all the tangible assets in a practice and how much they would be worth if sold. This method doesn’t take into account the value of intangible assets, however.
A market comparison approach uses data from other similar practices that have been sold in a particular area to determine the value of a dental practice. It takes into account the location, equipment and technology used in the practice, staffing models, patient base size, etc.
Finally, an income-based approach evaluates a dental practice’s projected future earnings and capitalizes them. It also takes into consideration the cost of capital and a risk premium to arrive at a final number. The best way to get an accurate valuation is to work with a trusted advisor who specializes in this type of transition.
Patient Base
The active patient base is a big factor in the valuation of a dental practice. Whether the practice is hygiene heavy, bread-and-butter or specialty heavy and what the current percentage of PPO versus Fee for Service patients is will help determine the value. Other influencing factors are the practice’s gross production per hour, type of dentistry performed (general vs. specialty) and the number of new patients added to the schedule each year.
The market comparison method is best for determining the value of your practice when you have access to sales data on other dental practices in your area that have been sold recently. It takes into account the annual revenue, annual net income, annual expenses and discretionary cash flow of similar sales. However, this does not take into account intangibles like goodwill and reputation.
Conclusion
Whether you are looking to sell your practice, negotiate a merger, or just prepare for the future by creating an estate plan – knowing the value of your dental practice is essential. Without this information, you may leave money on the table or get shortchanged in a sale.
While the traditional rule of thumb is that the value of a practice equals a percentage of gross revenues, this simple rule doesn’t accurately apply to most dental practices. In fact, every meaningful dental practice is unique.
One of the most commonly used valuation methods is the market comparison approach. This is based on market data of comparable practice sales in your area and multiplies your historical collections by a collection’s multiplier (which often ranges from 60% to 80%). However, this method fails to account for profits and can be difficult to find accurate data in small towns. In addition, it does not consider intangible assets such as goodwill.
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