Like any other business venture, a dental practice has value. It can be an essential factor when deciding whether or not to sell your practice and what price you should ask for.
Factors That Can Affect The Worth Of Your Dental Practice
If you’re thinking about selling your practice in the future, here are some factors to consider that will affect its value:
Cash flow and profitability
This is the most obvious factor in determining a business’ value.
Profitability, in this sense, can be defined as the percentage of revenue left over after all expenses have been paid. This number can vary wildly based on your practice’s overhead, but it is one of the most important numbers to track.
Cash flow is how much you bring in versus how much you spend. It indicates whether or not your business can withstand an emergency expense or some other unexpected cost.
That’s not all:
The revenue growth – how much revenue your practice has been generating in recent years is also considered. If it has been increasing steadily year after year, then this might indicate that you are doing something right and that there’s room for growth in the future. However, if revenue has stagnated or declined over time, this is not a good sign.
Ultimately, the more profitable and stable your practice is, the more valuable it will be (assuming other factors are equal).
Growth opportunities and potential
A buyer wants to know if he is buying an asset with potential growth or just an empty building with some equipment.
A good indicator is looking at your practice’s financial statements and projecting what they will look like in five years if you continue doing what you’re doing now.
If opportunities for growth, such as new equipment, software or technology upgrades, rising population, space for expansion, improved marketing, etc., exist, this can increase the value of your practice.
Location
The value of your dental practice will vary depending on where your practice is located.
For example, if you’re in a rural area, your practice will be worth less than in a city or suburb. This is because fewer people live in rural areas with fewer dentists in those areas, too. On the other hand, if you’re in a busy urban area with a larger population and varying demographics, your practice will be worth more because there’s more competition for patients and less demand for their services.
Also, even in an urban area, a dental office located in a busy area with easy access may be worth more than one hidden away in an industrial park. This can happen because more people will drive by and see your office than will drive into an industrial park looking for services like yours that aren’t visible from the road.
Competition
The competition in your market is a huge factor that will influence the worth of your dental practice. If there are many other dentists nearby, it could cut into your client base and make it difficult to get new patients. However, if there is little or no competition, it will be easier for patients to find you.
This is what buyers and industry experts (advisors, brokers, and the like) would also consider when determining how much your practice is worth.
Staff quality and turnover
Qualified staff can make all the difference in running your practice smoothly and efficiently – so also its value. Qualified staff members also tend to attract more patients as they have been trained to provide world-class care, which enhances patient satisfaction levels and drives referrals from existing customers.
In most cases, buyers would prefer a situation where the manager and other key staff members can ensure a seamless transition.
And that brings us to the second point: staff turnover.
Would important employees stay or leave after the sale of the practice? If it is the latter, chances are whoever is buying might want to force a lower price.
Equipment and technology
If your office has state-of-the-art equipment and technology that helps perform advanced procedures like laser dentistry or 3D imaging, this will also add to its value. The same holds if you have proprietary technology or procedure.
Debt burden
This is straightforward. The more debt you have on the business, the less it’s worth. If you carry much debt, expect to get less for your practice than someone who’s paid off their loans.
The average revenue per patient
How much profit do you make per patient? Buyers will do their due diligence and would be interested in knowing how many patients you see each day and how much profit the practice makes on each patient on average. This is because it helps them evaluate the financial health of your practice. In addition, it also gives them an idea about how much they could make by improving on your current setup or adding more services to their practice.
Timing of the sale
If you are in a rush to sell, you might be willing to accept less than your practice is worth. On the other hand, if you are selling a dental practice, waiting for an ideal time may give you a much better deal.
Goodwill and practice reputation
Goodwill in business is an entity’s intangible assets that “represents a certain value (and potential competitive advantage) that may be obtained by one company when it purchases another,” per Investopedia.
It is not easy to measure; however, it accounts for a significant part of what buyers will be willing to offer for your practice (up to 80%). Examples of goodwill include the practice’s reputation and recognition, customer loyalty, intellectual and digital properties.
Obviously, the more positive reviews on patient satisfaction and dentistry quality, the more valuable your dental practice will be. If your practice has negative reviews or ratings, it can negatively affect its value.
Other factors are
The general state of the economy, market demand, specialty of the practice, size and age of the practice, and need for a significant renovation.
How Dental Practices Are Valued
Professionals in the business employ a variety of techniques to determine the value of your practice. The three most common approaches are:
Market Comparison Approach
This approach compares your practice to similar practices that have recently been sold in your area. If you were to sell it today, you can also use this method to determine what you should be getting for your practice.
The biggest challenge with the market comparison approach is finding out the value for which similar dental practices in your area were sold. Also, it does not consider the peculiarities that differentiate your practice from its comparison.
Income Approach
The income approach values a practice based on its future cash flow projections discounted back to today’s dollars using an appropriate discount rate. This valuation method can be complicated because it requires knowledge of all aspects of the practice, including financial statements, cash flows, and growth rates for each year for at least five years into the future.
Examples are:
Discounted cash flow approach – this method uses projected future cash flows to determine value, usually over five years. Discount rates ( the range is between 23%-31%) are applied to these cash flows, and the net present value is calculated.
Income capitalization approach – Basically, projected cash flow for the following year or an average of previous years is divided by a capitalization rate to determine the worth of your practice. Capitalization rates at this moment range between 25%-31%.
Valuation based on multiples or “rule of thumb” – Some appraisers calculate the value of a dental practice by multiplying the gross income, cash flow, or EBITDA (Earnings before interest, taxes, depreciation, and amortization) from the practice by multiples. Multiples could range from 1.5x to 16X. Keep in mind that this is not the most efficient method of determining the worth of your practice.
Asset Approach
The value of a dental practice is determined by the appraisal of both tangible and intangible assets (including goodwill).
Tangible assets include equipment, fixtures, furnishings, and leasehold improvements. Intangible assets include a client base, patient database, name recognition, and goodwill.
The main advantage of this approach is that it provides a comprehensive view of all assets. However, it may be challenging to calculate since most of the value of a dental practice lies in goodwill and other intangible assets.
Final Word
Don’t be afraid to regularly engage in discussions about the value of your dental practice. It could be one of the best ways to keep sight of what’s going on in your business, as well as how the business is performing and which strategies are working best.
Angela Spearman is a journalist at EzineMark who enjoys writing about the latest trending technology and business news.
