If you’re in the market to buy an existing dental practice it’s important to understand how to value a dental practice so you get the best value for your dollar.
While there are lots of different opinions on the best way to value a dental practice, the best thing you can do is to hire a professional to do it for you.
By hiring a professional, you will an accurate appraisal or valuation that is up-to-date and reflects the current market value for the practice.
A dental practice appraisal is a formal opinion of the practice’s market value based on all a number of pertinent factors. These factors include:
- Gross income (revenue)
- Net income (profit)
- The fee schedule
- Staff information
- What type of insurance and/or payment is accepted
- Total number of active patients
- Number of new patients a month
- Specialties and procedures done in-house
- Patient and area demographics
- Market issues
- The practice’s goodwill
- Tangible assets
- Intangible assets
While this list is far from exhaustive, it should give you a good idea about how to value a dental practice. All dental practice valuations should include a written report that includes these factors and more.
In fact, a formal dental practice valuation is usually 50 to 70 pages long and includes supporting documentation or a Limited Report, usually this report is two to four pages in length and includes supporting documentation.
Both reports should have completed the same analysis, however the difference is that the comprehensive report should have significantly more data and discussion included in it, whereas the limited report is a summary of the information without much in-depth discussion of the data or findings. Both formal reports must be signed and dated by the appraiser.
The major benefit of hiring a professional appraiser is that he or she will be able to provide you with an unbiased report about the true value of the dental practice. This will better prepare you for negotiations when it comes time to hammer down a deal.
It will also help you secure a loan from a bank because most banks want the same information that the appraiser used to arrive at the sale price as a requirement for financing.
In general, there are three main valuation methods that are commonly used today to determine how to value a dental practice. These methods include:
Income-based valuation method
Income-based valuations calculate how much a practice is worth based on capitalized earnings or discounted cash flows. For an income-based valuation, income itself is defined as pre-tax cashflow. These methods are often the best ways to accurately establish the fair market value of the majority of dental practices.
Net asset valuation method
Net asset valuations are based on the tangible value of practice (i.e. equipment, office furniture, real estate, technology etc). For this kind of valuation, it’s difficult to be accurate because the value of most practices come from their intangibles, such as goodwill, trademarks and patient lists. In fact, a widely embraced “rule of thumb” for dental practice valuation is that 80% to 85% of a practice’s value comes from goodwill.
Goodwill values vary depending on location, supply and demand, patient demographics, etc. Two commonly used methods of evaluating patient records/goodwill are:
1. A specified dollar amount per active patient.
2. A specified per cent of average annual receipts.
Market-based valuation method
Market-based valuation are not as popular as income-based valuations. That’s because the focus is on the market data of other practices in your area. This method uses the practice’s past collection data and multiplies it by an industry standard collections multiplier. This method has its drawbacks because it’s not always easy to get comparable data from other practices making it difficult to compare apples-to-apples.
While each of these methods has their pros and cons, the best thing you can do is hire a professional who can walk you through each method to explain to you the pros and cons of each one and what method is best for the dental practice your considering buying.
By hiring an appraiser, it will not only give you an accurate value of the practice your are considering buying, it will also give you peace of mind that you are making an informed decision about what you are buying.
To learn more about how to value a dental practice you should download my book DentalEase – the essential guide to building the stress-free and profitable dental practice of your dreams. The first chapter is free to download and will give you even more insight into how to create a successful dental practice.