If you are a young practitioner with a healthy business, you’re probably not thinking about the value of your dental practice.
But what if we told you that you should?
Sooner than later, you will have to retire. Unless you have a son or a daughter willing to step in, you should definitely consider selling the practice.
Even without that, it is good to know how much your company is worth.
So, how to value a dental practice properly? Well, finding the actual value of a dental practice can be hard.
There are so many factors involved in the calculation, and it often comes down to your negotiating skills. As the old saying goes, a company is worth as much as another person is willing to pay for it!
Keep in mind that this is a big decision. It is also a very emotional decision.
In the end, dentists dedicate their whole lives to developing their practice, so it is tough to let go once the time comes. But, this also makes it hard to make a realistic assessment.
If you need assistance, we suggest that you hire a financial expert that will analyze various factors and give you a more realistic price tag.
There are various financial formulas that you can utilize.
For example, some experts will tell you that an average dental practice is worth 1.5 of their net income. There is also a calculation according to which it’s worth 70% to 90% of revenues they made in the last three years.
Of course, it also comes down to a lot of intangibles such as employees, market position, brand value, recognition within the community, etc.
Here are some of the best methods that you can use:
This is probably the easiest and most-straightforward calculation. As it is based on revenues, it is perhaps the most realistic of them all. Keep in mind that in this case, you have to calculate income before paying taxes.
There are two main approaches that you can use: capitalize earnings method and discounted cash flow method. According to the capitalized earnings method, you have to find the average income you had during the previous year. If you want, you can also use the data from the last several years. Then, this income will be divided by a cap rate, which usually goes around 30%.
The second method is the discounted cash flow. In this case, a financial expert will try to predict future earning based on the existing data. Usually, you will try to predict the potential income a dental practice will have in the following ten years. When you can get an accurate assessment, you will take that figure and then discount it. You need to find how much the future income would be worth right now (basically, you will reduce projected future revenues by 30%).
This method relies on the previous growth, but also potential growth. Both of these methods are pretty good as they rely on the cumulative impact of tangible and intangible assets. They will also discount these predicted revenues so you can get a better value in the present.
However, they are not always ideal. For example, they are pretty bad for practices that don’t have a constant stream of patients; practices that are on an upswing or a downswing. You need to have loyal patients to utilize this method.
Market value is an arbitrary method that relies on data to a certain extent. Basically, it uses the value of other similar dental offices in your area. In order to calculate it, a financial expert will utilize historical data. In other words, a person will look at collections times a collection multiplier.
Unfortunately, it totally neglects the profit, which is a significant cause of concern. Also, it is really hard to find a practice that has precisely the same traits and figures. Lastly, even if you do find it, you will be hard-pressed to get their data.
Calculating net assets is perhaps the crudest method of them all. In this case, a financial expert will try to find the current value of all the equipment, offices, and other material possessions. Needless to say, amortization will be performed in order to establish how much time these items have left in them.
This is the right approach for dentists who don’t have an office and want to establish themselves as soon as possible. Unfortunately, it takes little to no account of goodwill, which we will mention in the next section. In most cases, the calculation items will be valued at 85% to 90% of their current value.
In a way, this is like selling equipment, but if you are a dental expert who has been working for a long time, this is probably not ideal for you.
Goodwill is a term that is used for all the intangibles. For example, it can refer to brand name, customer loyalty, patents, licenses, a team that is employed in your dental practice, etc. It is a great way to determine how much people appreciate this company and whether it has a future.
While most of that value will stay with you, it is necessary to consider the fact that the owner will not be a part of that equation. When it comes to dental practices, owners are usually the dentists, and the main reason why a practice became popular in the first place. So, it is essential to consider the “value” of the remaining staff.
For example, a lot of patients will be loyal to the owner, but might not have the same relationship with other employees. This is something that needs to be considered, as it might have a significant impact on your potential profits.
Of course, when it comes to dental practices’ goodwill, there usually aren’t any licenses or patents, so at least you won’t have to worry about that.
Like with everything else in life, the answer is somewhere in between.
As already mentioned, each one of these assessment methods has its issues. For example, those that are focused on the financial side of the business are not ideal because you’re losing the leading dentist when you purchase a practice. Those focused on market value find it hard to determine the value of other practices.
If you want to have the best appraisal, we suggest that you use several methods at once.
Calculate each one of them and try to find an average. Also, you can omit those that don’t seem relevant for your particular practice.
Naturally, it is much better if you hire a financial person to perform the calculation for you. Or, you can hire an independent expert that will mediate between you and a potential client. That way, no one will be suspicious.
Anyway, it is crucial to be realistic when making this assessment.
Many dentists feel shortchanged when they sell their practice. However, this is mostly due to their personal feelings, and it’s not based on financials. No matter how you look at it, it is much better to sell your practice as soon as possible, as this will allow you to enjoy your retirement!
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