A Practical Guide to Dental Practice Valuations

What is a dental practice valuation?

A dental practice valuation is an appraisal offered by a broker determining the market value of a dental practice. It is recommended to have an accurate and current practice valuation every year.  Practice valuations are key when selling a dental practice, buying a dental practice, and practice mergers. Looking to determine the value of a dental practice? Get a dental practice valuation from a broker.

Getting a dental practice valuation is the first step in the process once you’ve decided to transition your dental practice to another owner. Your practice valuation impacts the entire dental practice transition process so it is important to do your due diligence. It is key to find a broker with expertise in practice valuations. An expert practice appraisal is a detailed review of all aspects of your dental business. It will disclose your practice’s strengths, weaknesses, and practical methods used in a practice transition.

What is included in a dental practice valuation?

An accurate valuation ensures the seller gets a fair price for their practice and that a buyer is getting a good value. For those looking to purchase a dental practice, a proper valuation will provide important information such as the price of the practice, the cash flow of the practice, and what the buyer acquires in the purchase.

Questions answered in a practice valuation.

An accurate practice valuation should answer many important questions including:

1. Can the next dentist accurately expect to make a profit?
2. What machines and tools will be included in the sale of the dental office?

Approaches to valuing a dental practice.

There are several approaches to consider when valuing a dental practice. A competent and accurate valuation will factor in these three approaches to value a practice – The Asset-Based Approach, The Market-Based Approach, and The Income-Based Approach.

The Asset-Based Approach

The Asset-Based Approach is a method based on the market value of the parts and pieces of the practice – the equipment, supplies, records, goodwill, and so forth. This approach is seldom (if ever) used for an ongoing practice with a successful cash flow. Still, this approach can be used in immature start-up practices or in the event of a seller’s death when the patient flow has all but stopped.

The Market-Based Approach

The Market-Based Approach is the standard method for valuing real estate. We examine comparable practices (region, type, size, etc.) that have sold and consider the price vs revenue as a percent. This is the approach most sellers and purchasers are aware of and tend to rely on. The flaw with this approach is that it provides no forecast for a purchaser’s financial success.

The Income-Based Approach

The Income-Based Approach determines a price based on an evaluation of current practice income minus practice expenses, plus how much a purchaser should be paid for providing patient treatment. This method provides a measure of what price a practice could sell for and still be financially successful for the purchaser.

Ultimately, it’s up to the experience and judgment of the valuator to determine which valuation method to use for your dental practice. No matter the method, valuations aren’t a clear-cut practice. The best calculation a valuator can make is an estimate of the fair market value of a practice based on their experience.

ADS Dental Practice Transitions is an alliance of independent dental practice brokers and management consultants. We have helped over 42,000 dental professionals transition practices since 1995.