Dental practice valuation is something we’ve excelled in for a number of years as a service to help both buyers and sellers best understand what a practice is worth.
Practice valuation is an art, one that is only perfected with years of experience as there is no real standard valuation method. Talk to 10 different professionals in practice valuation and you’re likely to find 10 different methodologies to get to a similar number. This means the only way to place an accurate value on your practice is through a detailed practice valuation performed by a dental-specific professional. However, there are a few things you can do to get in the general ballpark. We’ll discuss this below.
Some valuation methods use income-based models, such as net income divided by a cap rate. Simplifying for this particular example, let’s say your practice collected $800,000 in revenues last year with a 25% profit margin which results in a net income of $200,000. Divide $200,00 by a cap rate of 27% for a practice value of $740,741.
There are flaws with this methodology, however. It doesn’t consider external factors such as market and economic conditions. It assumes the buyer will be able to retain patients. It doesn’t consider dental equipment, office furniture and other physical assets.
Some use market-based valuations. This would be like a realtor running comps to determine the value of your house based on the sale price of similar homes in your neighborhood. This approach is flawed for a number of reasons, most significantly because no two practices are built the same.
Another method is based on the percentage of last year’s net collections. 70%-80% is a good place to start if you are using this approach.
These ideas might put you in the right zip code in practice valuation, but there are so many other factors. The condition of the market plays an important role. The market can shift from a buyer’s to seller’s market depending on inventory and external economic conditions. This can have a drastic effect on the value of your practice. The office lease factors in. Equipment, location, staff, condition of assets, procedures performed, even the reputation and growth of the practice over recent years factors in.
Dental practices are all unique. You can’t buy them at the store. Therefore, knowing the “going rate” takes experience and expertise. Give us a call if you are considering buying or selling a practice. Rely on our expertise rather than trying to do it yourself!