This article is part of our series about improving your dental practice. You can find the links to the other articles at the bottom of the page.
Are you thinking of selling your dental practice? If so, you’ll want to determine an accurate dental practice valuation before placing your practice on the market or talking with a potential buyer.
Dental practices and other healthcare organizations use several methods to determine their business valuations. Some use the standard rule of taking 70% of their gross revenue to determine their sale value. However, while this rule may be accurate for some, it does not always paint a precise picture of your market value.
We’ve put together this guide to provide you with three methods to determine dental practice valuations, and how to increase your practice’s value through different strategies and investing in dental software. Read on to learn more about these dental practice appraisal methods
13 Things To Consider When Appraising a Dental Practice
Numerous factors play into the total fair market value of a dental practice. If you’re looking to arrive at a precise, accurate valuation of your practice, you’ll need to consider all of the following elements that contribute to your practice value:
- Annual revenue: How much revenue does your practice make, on average, each year?
- Discretionary expenses: What expenses does your practice have that you could live without? For example, discretionary expenses may include meals, parties, entertainment, and business trips.
- Equipment age and condition: How much is your equipment worth?
- Gross income: What is the average sum of all of your practice’s earnings before taxes or any deductions?
- Growth potential: What opportunity does your practice have to generate larger profits and increase appointment availability in the future?
- Leasehold improvements: What improvements have you made to the physical dental office since you began leasing it?
- Location: Is your practice in an HCOL or LCOL region? How many other dental practices are in your area?
- Net income: How much income does your practice generate each year minus taxes and deductions?
- Patient base: How large is your patient base compared to other dental practices in your region?
- Patient retention and attraction: At what rates do you attract new patients and retain existing patients?
- Real estate condition: Is your property in good shape? Will the buyer need to perform any essential renovations?
- Reputation: Does your practice have an overall positive reputation among patients? Will the new practice owner be able to maintain this reputation?
- Staff: How many employees do you pay each week?
The methods below do not include all of these factors in their formulas. As a result, we recommend looking at this list and considering which factors will contribute the most significantly to your business valuation, then adjusting your appraisal accordingly.
3 Valuation Techniques To Knowing a Dental Practice’s Worth
If you’re looking for an accurate appraisal to use for your practice sale, you may want to use each of these valuation methods, then average the values you calculate. However, if you’re short on time or simply looking for a rough estimate to keep on hand for financial planning, you can simply use one of these methods to calculate your market value.
1. Income-Based Practice Valuation Method
Your dental practice’s cash flow, which is the net value of the payments transferring in and out of your company, makes up a large portion of your total valuation. As a result, many practices calculate their market value based on their revenue and expenses.
In this method, “income” refers to your EBITDA, or earnings before interest, taxes, and depreciation amortization. A dental practice’s sale price is typically two to four times its EBITDA figure.
You can calculate this income based on either your discounted cash flows or your capitalized profits. Here is some more information about each of these calculation methods:
2. Discounted Cash Flows Method
Using the discounted cash flows method, you can calculate your practice valuation based on an estimate of your expected future cash flows. Typically, you would need to forecast your net income over the next ten years, then calculate the value of that total income adjusted for the time value of money.
To calculate this figure, you first need to determine your practice’s projected growth rate and expenses for each year. Then, you must multiply these figures by a discount rate to determine the present value of the future cash flows.
The discounted cash flows method does have its limitations. Because this appraisal method relies heavily on future cash flow estimations, it could prove inaccurate.
3. Capitalized Earnings Method
The capitalized earnings or profits method is the more popular of the two income-based methods. This method considers the worth of your anticipated profits by examining your current net earnings and predicting your long-term performance.
In this method, you must divide your net present value by a capitalization rate to determine your total dental practice valuation. This capitalization rate can range between 15% and 30% depending on your specific dental practice type and size. For example, smaller businesses typically use rates between 20% and 25%.
Like the discounted cash flow method, this appraisal method has its limitations. The capitalized profits method depends heavily on future earnings, which can sometimes be challenging to predict. If your practice has only been in business for a few years, you may not have enough data to predict future earnings accurately.
As a result, for the capitalized profits method to produce an accurate practice valuation, you must perform adequate research to determine your anticipated profits and performance.
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Market-Based Valuation Method
The market-based method considers the selling price of other similar practices in your region. In broad terms, this method requires you to examine the market value of dental offices near you, then make adjustments for the differences between those practices and your own. These adjustments may include factors such as your:
- Office size
- Patient load
The market approach is the most accurate when you have access to sufficient data for the sales of comparable dental practices. If you live in a small town without any other dental industry branches or cannot find data about their sales, you may not be able to determine an accurate valuation through this method.
Additionally, unlike the income-based appraisal method, this method does not consider the practice’s future financial success.
Also Read: Looking To Open A Dental Office? Here’s Our Dental Office Cost Breakdown
Net Asset Valuation Method
Totaling your practice’s net assets is another way to determine your market valuation. Your net assets can include both tangible and intangible assets.
Tangible assets are the physical items and property in your possession. These may include:
- Real estate
- X-ray machines
Meanwhile, intangible assets are assets that are not physical yet hold value for your dental practice. These may include:
- Patient lists
- Brand recognition
- Intellectual property
Tangible property is much easier to appraise than intangible assets. As such, this appraisal method may not be as accurate as the other methods on our list. We recommend using your net valuation as a reference point for the other valuation methods on our list instead of as an accurate depiction of your total practice valuation.
The Dental Practice Valuation Rule of Thumb
Many dental practices using the above method to value net assets adopt a “rule of thumb” that states that about 80% to 85% of your total valuation comes from goodwill.
Goodwill is an intangible asset that may include your practice’s patient records, staff, and doctor’s reputation. These intangible assets are challenging to appraise accurately, yet they contribute significantly to your total practice value. If you were to sell your practice, the buyer would receive and profit from these assets.
Most dental practices hold the majority of their value in intangible assets. You should be sure to account for the total value of the goodwill your practice holds when appraising your practice market value.
Common Records Needed To Appraise a Dental Practice
When determining your valuation, you’ll need to acquire several records with information about your patient demographics, total patients, and other related figures.
Gathering and examining all of this analytic data by hand can be time-consuming. Instead, we recommend using a dental practice automation program that can fit seamlessly into your existing business practices.
Once you decide to sell your practice, Weave can also help make the practice transition seamless. You can use Weave to transfer all of your patient data quickly and easily to the new owner, saving you time as you transition out of the practice.
Whether you are looking to sell your private practice or simply determine a rough valuation for future use, using the proper methods for dental practice appraisals is essential to determine an accurate figure. If you’re having trouble appraising your practice yourself, you can always hire licensed appraisers or even a dental broker to handle the process for you.
In the meantime, you can begin using Weave to manage your patient data, digital marketing, communications, and other essential processes. Click here to watch your free Weave demo.
Check out the other articles in our “Improving Your Dental Operations ” series:
- Looking To Open A Dental Office? Here’s Our Dental Office Cost Breakdown
- 4 Dental KPIs That Every Practice Owner Should Know About Their Practice
- The Insanely Efficient Dental Scheduling Template Tips
- 8 Dental Recall Script Examples To Use In Your Practice
- 6 Impressive Dental Waiting Room Ideas