Common Practice Valuation Mistakes and How to Avoid Them
The value of any business is dynamic. Changes in the market, client base, or macroeconomic conditions all impact your practice’s value, making accurate evaluation a challenge. Dental practices are no exception. If you’re preparing to sell your dental practice, understanding its worth is foundational to the process. Without knowing your value, you can’t field or assess offers effectively. Worse, you might accept a low-ball offer and sell your practice for tens of thousands of dollars less than it’s worth.
Unfortunately, common practice valuation mistakes often plague dentists during this critical process. However, with a bit of expertise, these pitfalls are entirely avoidable. Read on to learn more!
Comparing Yourself to the Wrong Peers
Dentists often use what’s called a “market-based valuation” to estimate their practice’s worth. This method involves comparing your practice to those of local peers. Theoretically, this should work well since nearby practices often operate in similar markets. For example, a dental practice in urban New Jersey might compare itself to other urban practices, while one in rural Texas would look to its local or similarly rural peers.
While helpful as a starting point, this method has significant limitations. Even among local competitors, practices can differ widely in areas like equipment, debt levels, patient base, cash flow, and market positioning. These granular factors can skew the valuation. Comparing your practice to one down the street that recently sold might lead to a misleading valuation.
A market-based valuation can be a useful guide, but it shouldn’t be your sole method of determining your practice’s worth.
Neglecting EBITDA
Financial metrics like collections and profit provide insight into a dental practice’s value but are often incomplete. For instance, one practice might collect twice as much revenue as another yet be less operationally efficient and profitable.
This is where focusing on EBITDA—Earnings Before Interest, Taxes, Depreciation, and Amortization—becomes critical. By removing financial variables like taxes and debt, EBITDA highlights what really matters: cash flow. While net income is helpful, EBITDA offers a clearer picture of the core financial health of your dental practice.
It also enables comparisons across vastly different practices. For example, a large multi-location practice might have massive collections but an EBITDA margin of only 15%, whereas a mid-sized practice with fewer collections might achieve an EBITDA margin of 30%. At first glance, the larger practice appears more successful, but its lower EBITDA margin reveals operational inefficiencies.
Ignoring Equipment and Real Estate
Market-based valuations and financial metrics alone don’t paint the full picture of a dental practice’s value—especially when it comes to tangible assets like equipment and real estate.
Equipment and real estate are significant contributors to a practice’s overall value. Two practices with similar patient bases, debts, and cash flow could differ greatly in valuation if one has cutting-edge technology while the other uses outdated equipment. Likewise, owning the real estate where your practice operates can greatly increase its value.
Real estate ownership can also influence tax implications and deal structures when selling your practice, so be sure to account for these factors. Ignoring these assets could leave substantial value on the table.
Selling Without a Dental Transition Partner
Valuing a dental practice isn’t a task you should take on alone. Online calculators and DIY approaches are unlikely to produce an accurate valuation. Your dental practice is a complex business, and proper valuation is crucial to ensuring you sell on your terms and to the right buyer. An incorrect valuation could result in lost opportunities and unrealized financial goals.
Don’t go it alone—call Triumphant Transition Partners for a free consultation today! Partnering with a trusted dental advisor provides more than just an accurate valuation. The right transition partner can:
- Connect you with qualified buyers
- Help you screen potential buyers
- Offer insight into current market conditions
- Provide tailored advice to meet your needs and find the right fit
Triumphant Transition Partners is here to help. Call now for your courtesy consultation!