Dental Practice Valuations: What's Involved

Are you in the process of evaluating a practice to purchase or sell?  A thorough valuation (or financial analysis) is a critical step for both a seller or a buyer.  Most often, the valuation provides a good starting point for the initial start discussions and the negotiations that will follow.   If you are a seller, you want your team to search for a potential buyer who meets the criteria of your practice valuation.   

Assigning a market value to your practice is based on the consideration of numerous variable that include, but are not limited to the following:

• Net cash-flow available to the buyer
• Prior three-year collections
• Practice reputation within the market
• Market area growth trends 
• Competition within the market
• Practice specialty or unique points of difference
• Number of Active Patients (typically within 18 months)
• Lifetime value of patients (future profitability)
• Average number of new patients (three-year average)
• Practice location and visibility (street traffic)
• Length of employment and/or skillset of staff and associates (if applicable)
• Value and condition of assets/dental equipment
• Condition of the building and space
• Transition of the goodwill from the established doctor

A final valuation of a practice should include an explanation of the history of the practice and key facts, an explanation of the how the valuation was determined. The final valuation of your practice is provided in both hard copy and electronic report format, which can be shared with potential buyers and their team. In addition, the report includes as exhibits, a practice profile completed by the seller, and a pro forma financial analysis showing the net cash flow to the potential buyer on a historical basis.
How do assets they impact a valuation?
While cash flow is critical, the value and condition of dental equipment can influence the value of a practice. If your practice has invested $300,000 in updating equipment, this may value higher than a practice.  However, while new equipment does impact the value,  it’s critical to understand that on the valuation, it will not be a dollar for dollar increase.  In a practice valuation, the assets of your business are typically evaluated in relationship to how the specific equipment will help you generate profitability and therefore  it may be a few years before the return on investment is seen.  

How does overhead impact the value?
Overhead includes the operating expenses and the profitability of the practice, which are is key to the valuation. Typically, the overhead will be the total expense of the practice minus any of the following expenses:

• Owner's salary (including applicable payroll taxes)
• Owner discretionary expenses (Travel, Continuing Education, Automobile Expense, Cell Phones, etc.)
• Associate's salary and expenses
• Financing costs (interest expense, if applicable)
• Non-cash fees/charges (amortization, depreciation)
• Excess or additional rent if owner also owns building and are paying themselves a rent above or below the market rate
• Retirement or pension Expense
• Other personal or discretionary expenses 

Once these adjustments are made, whatever expenses remain are divided by the collections of the practice and result in the overhead rate of the practice. The overhead rate will typically fall between 30-50% in dentistry. The lower the overhead, the higher the resulting valuation (all things equal).  

Interested in learning more? We're always happy to have a conversation with you. Fill out our contact form to schedule a confidential conversation with a team member.

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