Are you thinking about selling your dental clinic in the near future? Or, are you starting a dental practice and trying to set yourself up for success down the road? If you own your dental practice, you run a small business. There are a lot of important aspects related to dental practice management, and one of them is tracking the value of the practice itself.
How can you determine how much your dental practice is worth? There are a few important points to keep in mind, so learn more below, and do not hesitate to reach out to an expert who can help you.
Dental Practice Multiples
If you need a rough estimate, one of the easiest things to do is to calculate a multiple of your annual revenue. This is typically called a valuation multiple, and it is an easy way to get a ballpark estimate of the value of your dental practice.
In general, you should expect a dental practice to sell for 0.5x to 0.75x of its gross annual revenue, but there are multiple factors that will play a role. For example, if your practice generally has high overhead expenses related to equipment and solutions, then your practice might not sell for as much. In addition, local economic situations could also play a role in the value of your business.
That being said most banks use a multiple of your EBITDA which is a fancy way of saying your profit. Generally speaking, most practices are valued between 1x to 2.5x of the profit. That being said, there are several important factors that will impact the value of your dental practice. Although the reality is that your dental practice is worth as much money as someone else is willing to pay for it, some of the factors that you will need to consider include the following:
Your Current and Future Cash Flow
Dental practice growth matters, and it will be dictated by your cash flow. This means that anyone who is interested in purchasing your practice is going to take a closer look at how much cash you have generated this year and how much cash you will generate down the road.
Of course, this means that any prospective buyer will take a look at your patient list, how frequently they come to the practice, and how long they have been coming to the practice. Then, they are going to take into account the cost of acquisition of your dental practice as well. They will have to take on the expense of purchasing the equipment needed to keep the practice going, paying the salaries of everyone who works in the practice, and assuming any related real estate expenses as well.
A prospective buyer is also going to consider the impact of practice acquisition on the patients who have been coming to the practice for a long time. Will the patients continue visiting your dental practice even if it is under new management? This unknown factor is one of the biggest reasons why it is unusual for a dental practice to sell for many times its annual revenue.
Because this is such a difficult factor to analyze, it is helpful to reach out to an expert who can help you.
The Valuation of Your Tangible Assets
There is a lot of equipment that is required to run a successful dental practice, and anyone who wants to purchase your dental practice will have to purchase that equipment from you. This is typically referred to as your tangible asset valuation, and it refers to anything that may have had a price tag on it at some point in the past.
Some of the most common tangible assets that dental practices have include:
There are probably plenty of other tangible assets that your dental practice has, but the exact nature of these assets can vary depending on the types of procedures you perform.
The Value of Your Real Estate
This factor is only going to apply if you own the property on which your dental practice sits. If you own the property or the building, you will have to sell the property and the building to whoever decides to purchase your dental practice. The valuation of your real estate may be considered separately from the valuation of the rest of the practice, but it can still be significant.
The easiest way for you to estimate the value of the real estate you sell with your dental practice is to take a look at the average price per square foot of other commercial properties in the same zip code. Then, you can use this information to calculate the estimated value of your real estate and add this to the value of your dental practice.
If you can afford to purchase real estate for your dental practice, it can increase the value of your practice significantly, so this is something that you might want to consider if you are starting a new dental practice.
The Value of the Goodwill of the Dental Practice
Finally, there is one important intangible asset that could also have a significant impact on the value of your dental practice. That is the goodwill of the practice itself. Some of the factors that will play a role in the goodwill of your dental practice include:
These are a few examples of factors that could impact the goodwill of the dental practice. The more goodwill your practice has built up over the years serving the local community, the more money you should be able to get for it down the road. That is because a prospective buyer should have an easier time taking over the dental practice and continuing its historic cash flow if the practice has been healthy for a number of years.
Value Your Dental Practice Properly with the Help of Dental & Medical Counsel
If you spend time building a dental practice from the ground up, you must make sure you do not sell it for anything less than it is worth. That is why you need to work with an expert team that can help you. At Dental & Medical Counsel, we have worked with countless dental practice owners, and we can help you value your practice as well. Contact us today to speak to our team.
Q: What methods are typically used to determine the value of a dental practice?
A: There are several methods that can be used to determine the value of a dental practice, including the income approach, the market approach, and the asset-based approach. The income approach considers the practice's future earning potential, while the market approach looks at the prices of similar practices that have sold in the same area. The asset-based approach focuses on the value of the practice's tangible assets, such as equipment and property.
Q: Can I determine the value of my dental practice on my own, or should I hire a professional appraiser?
A: While it is possible to attempt to determine the value of your dental practice on your own, it is generally recommended to hire a professional appraiser who specializes in dental practice valuation. An experienced appraiser will have a deeper understanding of the factors that affect practice value, as well as access to industry-specific data and benchmarks that can help to ensure an accurate valuation.
Q: How long does it typically take to complete a dental practice valuation?
A: The timeframe for completing a dental practice valuation can vary depending on the complexity of the practice and the specific methods used by the appraiser. However, it is not uncommon for the process to take several weeks or even a few months.
Q: What should I do with the valuation report once it is complete?
A: Once you receive the valuation report from the appraiser, you can use it as a basis for making informed decisions about the future of your practice. For example, you may decide to sell the practice, merge with another practice, or make changes to the management or operations of the practice based on the valuation findings.
Q: Will the value of my dental practice increase if I make improvements or upgrades to the facilities or equipment?
A: It is possible that making improvements or upgrades to your practice facilities and equipment could increase the value of your practice. However, it is important to weigh the costs of these improvements against the potential increase in value, and to ensure that any changes you make are aligned with the needs and preferences of your patient base.
At Dental & Medical Counsel, PC, we understand navigating the legal process can be tricky. We believe every doctor deserves the best advice and service so doctors can do what they do best, treat their patients. We make their lives easier by providing expert guidance, so they can focus on their personal and professional aspirations.
About Ali Oromchian, Esq.
In addition to practicing law for almost 20 years, Ali is also a renowned speaker, throughout North America, on topics such as practice transitions, employment law, negotiation strategies, estate planning, and more! Ali has helped hundreds of optometrists realize their professional goals and looks forward to aiding you in navigating the legal landscape.
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