Determining the true value of a dental practice is an art and science involving various practical considerations. This is really not much different than that of financial planning, mixing art plus evidence based science.
One would be hard-pressedto find a subject more confusing than that of dental practice valuation. Written appraisal reports include a standard disclaimer that states there is no single standard methodology used to value dental practices. So how do we value a dental practice if their is not set standard or “right way”?
I break down the two main valuation methods as “Academic” and “What really happens”. The academic approach is what you generally see in school taught lecture halls. It includes various scientific formulas, long equations and court tested reasoning. The most popular formulas include “percentage of gross collections,” “multiplier of net income,” and the complex “discounted present value of perpetuity formula.”
Let’s discuss the “What Actually Happens”. In any type of buy/sell situation, the true value of anything is determined by what a ready, willing, and able buyer will pay for something in the marketplace. (I think I took that last sentence straight from one of my textbooks in a college class on real estate.) Dental practices are much different than your home buying process, there is no multiple listing service (MLS) or central database of dental practices that have been sold. Some brokers might have a very limited amount of information, but that can not be reasonably relied on.
“How much can I sale my practice for?” It’s a simple question, but in reality, dental practice values are very volatile and value depends on a multitude of factors. The most well-known “rough rule of thumb” valuation calculation is to apply a percentage (e.g., 70%-85%) of the previous year’s collections. But this serves as only a rough starting point in the valuation process.
Dental practices are never identical, and one cannot be substituted or replaced for another in the same manner that other goods can. Each dental practice is unique and has a plethora of differentiating factors that must be subjectively (Art process) quantified in order to accurately determine its true value.
Fortunately, most of the time, the numbers do not go down or stay flat for buyers; they actually go up! Dental practice buyers are typically much younger than sellers these days, and they are performing a wider range of procedures in-house rather than referring those procedures to specialists. Because the younger dentist is usually more tech savvy and more in-tuned with social media this helps the growth exponentially.
There are many other factors that must also be considered, such as location, equipment, appearance, staff, reputation, patient mix, procedures performed, and many more. The likelihood of the production and profitability continuing for the buyer is actually more important than the current numbers.
If you are in the market to sell your practice or buy a new practice we should talk. We have software that can plug into the new practice’s accounting system that can dissect if this would be a good investment or not from the science side, and if it looks good we can then discuss the subjective side (Art) of the sell/buy.