How to Calculate the Value of a Dental Practice (In 2023)
What is Dental Practice Valuation?
Definition and Factors
Dental practice valuation is the process of determining the fair market value of a dental practice, considering various factors such as location, patient base, equipment, staff, financials, and growth potential.
Importance of Valuation
An accurate valuation is crucial when buying or selling a dental practice, as it ensures that both parties receive a fair value for their investment. It also plays a vital role in financial planning, exit strategies, and securing loans.
Working with Professionals
Engaging a dental broker or appraiser with industry experience helps obtain an accurate appraisal, which can be used to negotiate a fair price during a practice sale. Understanding the process of dental practice valuation better prepares dentists for successful practice transitions and maximizes the value of their clinics.
Importance of Dental Practice Valuation for Practice Owners
We have broken down the complicated process of dental practice valuation into an easy step-by-step guide. Read on to get a clear picture of what informs practice valuation and get hands-on advice for determining practice value.
Many Practice owners ask us: ” How can I determine the fair market value of my dental practice?”
And it’s a great question! Why?
Because knowing how much your practice is worth will help you make better decisions. You know that saying, “Knowledge is power”? Well, it’s true — especially if you want to sell or buy a dental practice.
Spare a thought for the dentists who underprice their practice – as a result; they miss out on an excellent opportunity to get top dollar. Or the buyer who thinks they’ve hit gold by buying a dental practice only to find that it’s a costly mistake when they discover they can’t make it work financially.
Don’t be like any of those above:
Fortunately, with a bit of planning and preparation, as your advisors, we can help you get the best possible price for your dental practice – so hurry get in touch with an expert right here.
● If you are considering selling your practice, it makes sense to have a valuation to get an idea of the worth of your business.
● Suppose you are thinking about buying another practice. In that case, it makes sense to get a valuation so that you can decide whether or not it will be worth the investment.
That said, this article will provide you with information on the following:
● Factors that can affect the worth of a dental practice.
● How to do a dental practice valuation.
Let’s get started!
Factors Affecting Dental Practice Valuation
While the price of a dental practice is a function of several factors, it’s essential to understand them to know what you’re getting into and make informed decisions.
Hint: Nothing beats a tailored selling strategy if you want more money from selling a dental practice. Take, for example, a client who was able to get 2.6X more than the initial asking price he felt was a good deal just after 90–days of listing his practice with us. You can get similar outcomes: get in touch now, and we’ll be happy to discuss how we can help.
As we delve into the factors affecting practice valuation, it’s essential to hear from those who have experienced the process firsthand. Before we move ahead, take a moment to check out these video testimonials from our clients, Dr. Sharon Gorman and Dr. David Graeff, who have experienced the incredible benefits of partnering with Transitions Elite when it comes to practice valuation and selling. Discover why understanding the true value of your practice is crucial and why Transitions Elite is the best choice when looking to sell.
“I had previously looked at selling the practice on my own, and I had talked to five different companies about this and had gone through the process individually, and none of it turned out to my satisfaction. After I signed up with Tom, he marketed me to these interested companies. There was competition amongst those interested. It was so relieving at the end of it to know that I got the very best deal possible!”
David Graeff, Cedar Rapids, Iowa
I knew that I would get the best value for my practice if I had a professional helping me. And it definitely turned out to be true that having Tom in my corner.
I have zero doubt that I would not have gotten the value for my practice if I didn’t have him on my side as well as the ease of it. It was such an easy transition and he made the entire process very simple.
Sharon Gorman – Las Vegas, Nevada
Let’s get back to the key factors that affect the worth of your dental practice:
Financial Performance Of Your Practice
Arguably, this is one of the primary things prospective buyers would look at. If your practice is doing well – making a good profit evidenced by cash flow- you can expect to get a significant amount for it when you sell.
If buyers discover that a practice is involved in a legal battle, they won’t want to touch it with a pole. Those bold enough would like to pay below its value.
Location And Demographics
Dental practices in high-traffic areas and those that serve a large number of patients can command higher prices than those in less populated areas or those with a smaller patient base.
The reputation of the dentist and the staff is also essential when determining the value of a dental practice. If people are happy with their service, they’ll come back again and refer others as well. The more referrals you have, the better off your business will be.
If many other dentists are offering similar services within driving distance, then it’s likely that it would cost less than a similar practice with no or few other dentists.
Technology Used In Your Dentistry
Practices that use cutting-edge technology tend to be worth more than those that don’t because they can treat more complicated cases and provide better patient care.
Your Staff Members’ Experience Levels And Training
If key staff members are well-trained and experienced in what they do, this can make them more valuable to buyers.
The Condition Of The Practice’s Equipment And Facilities
An outdated dental office can have a negative impact on buyers, so it’s essential to keep everything up-to-date at all times. While significant renovations might not be necessary, minor updates here and there can help keep your place looking fresh and modern, even if you’re not thinking about selling anytime soon.
Other factors include:
● The state of the economy – A recession can cause people to cut back on dental care, hurting your practice’s worth.
● Specialization (types of services offered) – Some procedures are more profitable than others, so a practice specializing in them would likely command a premium price.
● Age – More often than not, older practices have more value than newer ones because they have more established patient bases and referral networks.
● Debt load – How much debt do you have on this practice? If there’s no debt on it, it’s worth more than if there was debt on it.
● Other contingencies – Be aware of all the potential contingencies that could affect its worth. For example, existing contracts and terms of your lease: if it is non-transferable to the new owner, it could be a reason the buyer would push for a lower price during negotiations.
Takeaway: These factors would be considered by buyers when they want to negotiate prices. We recommend that you fix any ongoing issues you can. If you have any questions or need other assistance, head over here.
How To Do A Dental Practice Valuation
Quickly, let’s address this pertinent question…
Should I Determine The Value Of My Dental Practice Myself?
As a dentist, you are good at what you do – including running your dental practice. But it differs from being qualified to value and sell it for top dollar. Putting it differently – chances are high that you can’t accurately determine the fair market value of your practice if you do it yourself.
Dental practices are a unique asset class. And the valuation methodologies used for other types of businesses may not apply to dentistry.
Here’s the thing:
Considering the importance of valuation, this is not something you want to gamble on and hope for the best. You don’t do that when caring for your patients, so you shouldn’t do that when valuing what took you years, lots of sweat, and blood to build. We suggest looking for someone who specializes in valuing dental practices – they will have experience with these types of transactions and know precisely what to look for when conducting an appraisal.
However, it will be good to understand the various methodologies employed in appraising a dental practice.
Methods of Dental Practice Valuation
The Multiplier Approach
The multiplier approach is a method that’s been around for a long time. This valuation method is based on the principle of the “rule of thumb.”
The rule of thumb is that the gross revenue a practice generates yearly would be multiplied by 1.5 to 3 times.
Similarly, a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization is another approach widely used. In this case, the multiplier is 4x to 15X (might be more) the EBITDA.
For those who don’t know, EBITDA is calculated by adding back interest, taxes, depreciation, and amortization to earnings (net income).
Lastly, other people would calculate the value of a dental practice by averaging 70%-80% of the previous three years’ collections.
The biggest caveat:
This method is often not an accurate representation of the fair market value of a practice. Thus, it can be misleading.
Market Comparison Approach
The premise is that a dental practice is worth as much as any other similar dental practice in its market.
You can use the market comparison approach to estimate what a specific dental practice should sell for on the open market today. It does not consider intangible factors such as goodwill, reputation, or patient loyalty. Still, it does take into account factors such as location, equipment and technology used within the practice, number of employees, patient base size, and more.
The major problem with this method is that it won’t work if there’s a big difference between your practice and others in terms of location and type of patient population served. Plus, you may discover that other practice owners who sold may not be willing to disclose the amount for which they sold their practice.
Income-based Valuation Approach
The income approach estimates the future earnings of a practice based on historical data and projected costs and revenues. This method considers tangible and intangible assets such as cash flows and growth potential.
Most savvy buyers rely on this method to determine the worth of a dental practice. Suppose your practice has a large patient base backed by solid revenue and growth. In that case, this is the valuation method you should consider.
Income-based Valuation approach in action
There are two common methods when using the income-based approach. They are:
Capitalized Earnings Method
To find the fair market value of a dental practice, divide the average of the last few years’ net incomes by an industry-recognized cap rate of 25% to 31%.
Discounted Cash Flows Method
The method involves using financial data from past years and projecting it into the future to forecast cash flows. The projected cash flows are then discounted by a discount rate – the rate of return (23% to 31% for dental practices) to estimate the current value.
The Asset Valuation Approach
This approach attempts to value each asset owned by the practice and then add them together for a total value. It includes tangible assets such as equipment, furnishings, and fixtures, as well as intangible assets such as goodwill, client lists, and patients’ records.
The process can be tedious and time-consuming, but it does provide a reliable basis for estimating the value of a dental practice.
The primary benefit of this method is that it allows for flexible taxation of individual assets based on the buyer and seller’s preferences.
What is goodwill?
Goodwill is a business’s intangible asset in its brand, reputation, customer base, or other factors influencing a buyer’s decision to purchase the company. When you sell your dental practice to an acquirer, the goodwill value is included in the purchase price. Unfortunately, goodwill is not an objective measure defined by a formula or algorithm. It’s an intangible asset that cannot be measured by financial statements alone – it is what separates successful practices from struggling ones. It’s what makes one practice worth more than another in the eyes of buyers. In fact, goodwill accounts for 80% to 85% of a dental practice’s worth.
Important Disclaimer: This is not a substitute for professional or tax advice. Always consult your accountant and/or attorney before making any decisions.
Want To Sell Your Dental Practice? We Take Away The Hassle And Confusion.
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Our team of dental practice advisors can help you every step of the way. At our boutique practice advisory firm, we focus on addressing the unique needs and challenges of dental practice sales. Our team of experts is here for you every step of the way—from finding the right buyer for your practice to helping you negotiate an agreement that works for both parties.
Don’t let an excellent opportunity to make life-changing money slip through your fingers. Get in touch now – and we’ll discuss how we can help you.