A dental practice valuation is like a preventative checkup on your practice’s financial health. A certified dental practice broker will take an in-depth look at your business’s health and diagnose any areas that may need adjustments or improvements.
Periodically paying for a quality valuation on your business will put you in the best position to get your practice in top shape when you are ready to sell it.
In this article, we will explore the cost of a practice valuation and the potential factors involved in determining what you pay, including timing, the disadvantages of free valuations, features of your practice, and other factors that influence the outcome of the valuation itself.
The cost of a dental practice valuation will vary widely based on the complexity of the practice(s) involved. Some factors that affect the dental practice valuation cost include:
While these are some of the more common factors, a multitude of other questions and scenarios can affect the cost of valuations.
A dental practice valuation is a professional opinion of the practice’s market value based on all the relevant information. Most financial institutions will want the same information that the dental practice broker has used to arrive at a value to secure financing. The following are the major items that are analyzed when preparing a practice valuation:
It is best to conduct a practice valuation two to three years prior to the time the practice is out on the market to sell.
Most dental practice valuations are done for doctors, either selling a portion or all of their practice. In this case, we advise getting valuations periodically in advance of your desired sell date – two to three years prior is reasonable.
A qualified professional valuator or dental broker who specializes in practice valuations can highlight any line items that could decrease the value of your dental practice or make it difficult for a buyer to get financing.
The valuation will reveal the strengths and weaknesses of the practice, which will be identified by the practice valuator, who knows the industry standards and can inform the practice owner on how their practice compares to others in the area. This will allow the practice owner to have enough time to identify and improve on the weaknesses of the practice for better outcomes.
So, why pay for a valuation of your dental practice when you have offered to get one for free? Understanding that a free dental practice valuation can often cost you more in the long run than paying for a quality valuation is key.
Free valuations are typically done with a quick rule of thumb, straight percentage methods of collections, or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) that can be misleading and just wrong.
The problem is the lack of specificity regarding all expenses, including salaries and occupancy costs, which can vary greatly from seemingly two similar practices.
It is important a qualified professional thoroughly analyzes all the financials and facts of your dental practice, utilizing appropriate dental practice valuation methods and adjustments.
Of course, other reasons besides selling practices for obtaining valuations include litigation, partnerships, mergers, estate planning, etc. These, too, require a comprehensive valuation from a qualified professional.
At ADS Precise Transitions, we perform valuation engagements and present our summary report in conformity with the National Association of Certified Valuators and Analysts (NACVA). The valuation analyst expresses the results of the valuation engagement as a conclusion of value, which may be either a single amount or a range.
The standards of value are investment value and fair market value. The investment value is fair market value without consideration of discounts. This is defined in Revenue Ruling 59-60 as “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”
Most valuations are the “going concern value” type of practice value. These include the dental equipment, office equipment, furnishings, instruments, supplies, patient records, goodwill, URL, and telephone number(s) assigned to the practice.
It’s important to note that analyses include, but are not limited to, the above-mentioned factors. To demonstrate a cash flow profit available to a subject practice, Federal Income Tax Returns and/or Income Statements are analyzed. Adjusted income statements are then developed from the Tax Returns and Income Statements to demonstrate the true net income of the practice.
It is from the adjusted net income that the buyer will receive the return on his/her time and investment, and service any debt incurred with the acquisition of the practice.
Dental practice valuation methodology involves assessing a dental practice’s assets and adjusted net income using standards like fair market value, with calculations based on financial analyses to determine potential return on investment and debt serviceability for the buyer.
The true cost of operations is determined by calculating the adjusted net income. Dental practices are analyzed using both a capitalization of earnings approach and an assets summation approach.
The information analyzed includes:
As you can see, a lot of information and analysis goes into developing a professional valuation for a dental practice. Armed with a quality valuation, the selling doctor is in the best position to get the best price for their practice and a smooth transition.
The cost of dental practice valuation is very much linked to the opportunity cost you are willing to risk. We recommended doctors arm themselves with a quality valuation to get a precise report on the practice, know when they are ready to sell, and if the practice is in the best possible position. A professional valuation will allow you to make any improvements to increase the value of the practice prior to the sale and supply you with documentation on the market value of your practice.
This all leads to a much smoother dental practice transition, makes negotiation and financing easier, and enables you to collect the correct price for all the years of hard work you put into building your practice.
At ADS Dental Practice Transitions, our experienced dental practice brokers provide comprehensive, accurate valuations tailored to your needs. Contact us today to schedule a consultation and learn how we can help you maximize the value of your dental practice.
Since 2003, Mr. Esposito has been instrumental in appraising and/or selling more than 1,012 professional practices. These have included general dental, pediatric, periodontal, endodontic, orthodontic, oral and maxillofacial surgery and some audiology practices. He has appraised and/or sold dental practices in dozens of states. Mr. Esposito is a qualified practice valuator, with membership in NACVA (National Association of Certified Valuation Analysts), IBA (The Institute of Business Appraisers), ADS, a national network of dental practice appraisers and brokers, and PVSG, (Practice Valuation Study Group).
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