Dental Practice Valuations
For many dentists, their most valuable asset is their dental practice. Knowing what it is worth is crucial when facing a major event such as buying or selling the practice, entering into a buy-sell agreement, doing financial or estate planning, or getting a divorce.
All the dentists we’ve ever worked with have a “guesstimate” in mind of their practice’s worth. Those guesstimates are almost always based on a rule of thumb. The most important message we can share is this: rules of thumb are always wrong.
Consider this statement—a fairly typical formula—from the website of the Gauthier Law Firm:
“A good rule of thumb is that a health care practice is worth anywhere from one to four times its net earnings. A practice netting $300,000 after expenses might be worth anywhere from $300,000 to $1.2 million.”
If you rely on this rule of thumb, then your dental practice might be worth $300,000. Or it might be worth $1.2 million. Or it might be worth something else entirely. Gee, thanks a lot. If you are selling the practice, which of those figures should you be asking?
Appraisals Consider Income Potential, Assets, and Much More
Without knowing exactly what the business is worth, you risk leaving a lot of money on the table or scaring away potential partners. Or worse. That is why having an accurate appraisal beforehand is essential.
So, how do professional appraisers like SPARDATA value a dental practice? There are three principal methods appraisers use to value any business: the market approach, the income approach, and the asset approach. Of these, the income approach—which estimates the company’s value based on its ability to generate income—is most often used to value a professional practice. Together the owner and appraiser map out a projection of the practice’s likely future sales, earnings, and cash flow over the forecast period.
With respect to cash flow, for example, the appraiser converts projected future cash flows into a present value using a discount rate appropriate for dental practices in today’s market. This figure is then adjusted by a “fudge factor” to take into account that projections are just that—projections—and will invariably prove to be wrong. Click on the link above (Sample Medical Practice Valuation) to see SPARDATA’s detailed appraisal of another type of professional practice.
Many other factors affect the value of a dental practice, including the practice’s location, the patient base, the professional’s area of specialization, and how payments are received from patients and third-party payers. Tangible assets such as equipment and real estate the practice owns are important, too,
A Good Valuation Is Essential
SPARDATA has found that business owners often think they know their company’s value, but in reality may be shockingly misinformed. In 2001, for example, we surveyed 2,000 business owners and found that most misjudged the value of their businesses by 50% or more—sometimes by millions of dollars. So be sure your practice is properly appraised before selling it or implementing any financial plan.
