Like anything else in life, there is an easy answer to the question, “How much is my dental practice worth?” “However much someone is willing to pay.” The reality is that you can have valuations done all day long, and they will conflict with each other because they are based on different methodologies, and at the end of the day, none of them really matter if no one is willing to pay the valuation price. Still, valuation is a vital component for both buyers and sellers, so it is important to have a professional valuation completed.
It can be argued that there are two basic ways to value a dental practice: academic and real world.
The academic approach is used to generate a written appraisal. There are many different formulas, generally based on capitalization of earnings, discounted cash flows, or even net tangible and intangible assets. Take a few years of data, apply a generally accepted multiplier, do some hand waving, and arrive at a number. If performed by a financial expert with subject matter knowledge in dental practices, this will arrive at a reasonable valuation.
The real-world approach acknowledges both the usefulness of appraisal formulas and the importance of understanding the market. Practice brokers specialize in dental practice sales transactions, and are experts in the current marketplace. While there is no central database of dental practices that are currently on the market or have recently sold, practice brokers have enough experience to know what similar practices are generally selling for.
The Limitations of Valuations
Of course, the problem is that no two dental practices are ever truly that similar. One might be owned by a dentist who has fine-tuned overhead expenses to an extremely low level that a buyer may not be able to match. One might have a base of long-time patients who have had all major procedures done and only come in twice a year for cleanings. Perhaps the selling dentist does rare procedures that the buyer cannot or does not want to perform, or maybe the seller is unusually speedy at performing complex work. The patients might be extremely loyal to the selling dentist, and many may decide to leave rather than stay with the new dentist.
On the other hand, the buyer might be a hot new dentist who performs virtually all services in-house, while the seller referred most complex cases out to specialists. The buyer might be more marketing savvy, or more committed to digital dentistry, or have more of a flair for the business side of the practice.
Likewise, the value of the office lease must be considered. Is it stable, and are the payments reasonable? What about the location of the practice? Is it in an up and coming neighborhood, a long-established one, or an area that is in decline? Parking, visibility, staff, reputation, and many other details must also be taken into account.
All these factors and more make dental practice valuations both an art and a science. Because dental practices have few hard assets, and are not interchangeable commodity goods, it is crucial that any valuation be performed by an expert who understands what happens after a practice is sold. The best valuations are done by those who are excellent at quantifying the likely future productivity and profitability of the practice for the buyer.
Ascent Dental Solutions is a full-service agency dedicated to helping dentists build their practices and map out their careers. It is the brainchild of Dr. Kevin Coughlin, who earned his doctorate at Tufts University School of Dental Medicine and currently serves as a faculty member there. While Dr. Coughlin continues to practice dentistry as the principal owner of the 14-location Baystate Dental PC, he has a strong passion for helping fellow dentists maximize their success. If you are interested in learning how to take your dental practice to the next level, please contact Ascent Dental Solutions today at 413-224-2659 to learn how Dr. Coughlin can help.