How To Value A Dental Practice
Learning how to value a dental practice can be tricky for dentists looking to sell their practice. Most dentists are experts at tending to patients and running their practice, but the valuation of a practice can be a potential hurdle. It truly requires a high degree of financial competency and business acumen to properly evaluate a dental practice. And while dentists are highly skilled within their profession, using EBITDA and free cash flow to properly value a dental practice is something entirely new and different.
At Triumphant Transition Partners, we know the dental practice valuation process from front to back. Plus, our healthcare-specific CPAs on staff are experts on the subject, given that they perform healthcare practice valuations daily. All that to say, we’d love to share some of our thoughts and advice, Please note that all recommendations here are not fool-proof bits of business advice. A custom dental practice valuation is always best practice.
Learn About How To Value A Dental Practice
What Goes Into A Dental Practice Valuation?
The truth is that there is no sure-fire, copy-and-paste way to value a dental practice. Every practice, market, situation, and business model is different and requires a unique valuation. The reason why is relatively simple. The more accurately you value your dental practice, the better you are primed to make good decisions about selling or buying said practice. As a dentist looking to sell or buy a practice, you don’t want to undersell or overpay, and an accurate dental practice valuation is the best way to counteract this.
There are several different ways of valuing dental practices, and unfortunately, some of the rules of thumb circulating in the dental management community aren’t useful. The 1.5 net income rule and the 75% of the last few years of collections rule are helpful for quick estimates, but they are just that: estimates.
There are many ways to value a dental practice, and a quick and easy rule-of-thumb is not a solid cornerstone for a business decision. The sale or purchase of a dental practice is likely to be one of, if not the biggest, decisions of your professional life. Don’t rely on simple guesswork. instead, pursue a comprehensive dental practice valuation.
Understand How You Want To Valuate
There are several different ways of determining a dental practice’s value. Like many elements of economics, this can be confusing and helpful. There are several different ways of valuing a dental practice, so you have different methodologies to check your work. Utilizing three or four different methods of valuing a practice is likelier to produce an accurate result than one. However, the variety of valuation methodologies can be confusing for dentists, so we have compiled some of the more common methods here.
Income-based valuations of a dental practice tend to produce the best results. The reason why is that these methods look ahead to projected future net incomes and/or backward to the prior year’s net income. This paradigm gives you an accurate view of the practice’s financial health. If you have a knack for finance and economics, you might discuss whether a capitalized earnings or a discounted cash flow method fits your needs. The better you understand the net income of a dental practice, the better you understand the practice’s business situation.
A market-based valuation looks at the market a practice operates in and compares the practice to similar dental practices. The goal is to use the historical collection data of these practices to inform the seller or buyer of the value of the practice in question. While this is a useful endeavor, it’s not a foolproof methodology. We tend to be a little skeptical of relying only on this method.
- Not all practices are the same. If you assume the practice in question is the same as those in the area, you leave the door open for unintended errors. Every practice in your market has at least one unique variable that raises or lowers its value. Assuming every practice in the market is exactly the same could be problematic.
- Intangibles are difficult to measure. Brand perception, patient base, future growth, and patient trust are almost impossible to measure in a market-based paradigm. While these are still difficult to gauge in an income-based view, an income-based view at least values the practice on its own. A market-based valuation compares your practice to others without a failsafe way to evaluate these intangibles.
- This method doesn’t capture profit. Looking at a practice’s collections versus others in the area doesn’t properly consider the practice’s profitability. Without that piece, a market-based evaluation can be inaccurate.
An asset-based valuation ought to be the most accurate way of valuing a dental practice, right? The value of all assets should be a surefire way to take stock of a dental practice since it’s a pure stock of tangible assets.
Well, yes and no. Asset-based evaluations are still flawed. For instance, older practices might have less valuable equipment, but these practices likely have the best brand recognition, patient base, and income potential in an area. A young practice without a loyal patient base but blessed with expensive assets might be valued higher than an established practice, even though the expected earnings of that young practice are likely much lower than the established practice. Asset-based valuations can be helpful for practices that hold a large amount of real estate, and they can still be insightful if used alongside other methods. However, we would never depend entirely on an asset-based valuation.
Valuing A Dental Practice
Valuing a dental practice can become complicated, especially if you aren’t an expert in business models or selling a business. As a result of that complexity, it’s imperative that you are able to properly value a dental practice in order to inform your business decisions. It’s just too important a piece of data to estimate.
That’s where the experts at Triumphant Transition Partners enter the picture. We know how to value dental practices and equip you with the most accurate information possible. We’re here to help you through the process and be your trusted partner. Valuing, selling, listing, and closing on a dental practice is a complicated process. Turn to a team with expertise in the area to help you navigate the deal cycle and help you sell your dental practice!
Ready to learn more? Reach out to your trusted Triumphant Advisor today for a courtesy consultation. Fill out the contact form below or give us a call to get started.