How To Calculate (And Maximize) Dental Practice Value

As a dentist, your experience holds a value that’s often hard to measure. You’ve built many relationships in a high-touch profession, and your team sees you as their leader. The wealth of trust you’ve built underscores your reputation and goodwill, and this investment in people becomes part of your legacy. Much of the fulfillment in dentistry comes from the journey and the interactions that enrich it.

But there’s another wealth you take with you, too: Practice value. As a business owner, you’ve created a profitable enterprise that provides a living. If you’ve adequately integrated all the business components, the right buyer will evaluate your practice and choose it amongst the other offerings in your region. Although we’ve discussed specific factors that affect your practice profitability and value, these three primary areas deserve constant attention:

  • Operations: What functional pieces support the patient journey and delivery of first-class service? This includes staffing, scheduling, inventory control, and more.
  • Branding and Marketing: How consistent is your multi-platform approach across online and offline channels? This includes external and internal marketing to attract and retain patients.
  • Financial Management: Do you know your fixed and variable costs, overhead targets, and profitability? This includes real-time daily metrics and profit-and-loss reports.

Practice Valuation Methods To Consider

Practice value may be determined in several ways, and a thorough valuation can significantly affect your final exit plan. It’s essential to explore the factors that drive the value of your practice, and trusted resources can help ensure you’re armed with the correct data. In today’s world, many practices receive unsolicited offers from DSOs. But most of the time, these offers won’t be in your best interest. A basic understanding of common methods gives you a starting point to ask the right questions and maximize the value you’ve earned.

Consider these three methods used in dental practice valuations:

Market-Based Method: The practice value is computed to be 50-85% of the previous year’s collections. This number is a very rough estimate affected by many variables, and it’s simply a starting point for a deeper dive. If a thorough valuation shows you’re at the low end of this estimate, it may help you explore where to improve your practice to increase the value.

Net Asset Method: The net asset method Weigh the value of all tangible assets, including equipment, computers, furniture, and intangible assets, primarily practice goodwill. In this method, most practices find that most of their value is in goodwill; it’s not uncommon to see 80-85% of the value attributed to goodwill. Net asset valuations can be ambiguous because it’s challenging to measure the intangibles, and it’s best to consider this as an adjunct to other valuation methods.

Income-Based Method: True business value is generally related to its cash flow, the investment risk, and the expected return on investment for the buyer. Most knowledgeable buyers and sellers, including DSOs, usually choose the income-based method to calculate practice value accurately. This approach is calculated on capitalized earnings or discounted cash flows and provides a reliable strategy to reach the fair market value of many dental practices.

Income-based valuations consider the pre-tax cash flow of practice. They can be calculated in two ways:

  • Capitalized Earnings Method — This computation takes the average of the last few years’ income and divides it by a capitalization rate to reach the fair market value of a practice. The industry standard cap rate is between 15% to 30%, and most practices fall on the higher end of the range.
  • Discounted Cash Flows Method — This method projects the practice’s net income for the next ten years and computes the net present value of that total income. A valuation expert determines the projected growth rate of collections and expenses annually and discounts the rate by the assumed cost of capital and a risk premium factor.

Your Dental Practice Value Deserves Expertise

Every dental practice offers unique characteristics that need consideration for a complete valuation. The financial data is critical, but other considerations include location, regional economics, staff stability, procedures offered, payor mix, and more. Regional transition specialists understand the art and science of practice valuations that produce expected outcomes.

At DDSmatch, we can help you analyze your practice from every angle and determine value, timing, and options as you plan your future exit. We only use Certified Valuation Analysts by Blue & Company to provide a comprehensive appraisal of your practice. These highly-trained, Certified Public Accountants specialize in evaluating businesses focusing on medical and dental practices.

Reach out today to discuss your practice and goals for the next steps in your journey. I’m available to help you evaluate your options and to help you navigate the practice valuation process to maximize the value you deserve.

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