Understanding Dental Practice Valuations

Understanding Dental Practice Valuations

Dental practice valuations can be relatively difficult to determine. While the option of choosing a professional valuation company is always present, this oftentimes is an expense that is too high to justify. However, when a dental practice is seriously perusing the sale of their business, it will be of the utmost importance to have a proper valuation come selling time.

Understanding Dental Practice Valuations

There are many factors that will be determined by the reason for sale. If succession is taking place, a sale price may be lower if the business is staying in the family. For this reason, there is no “rule of thumb” that can be used when selling a dental practice. Instead, it is up to the owner to ensure that the selling price is within an adequate range. With this said, there are general valuation forms that will need to be considered and that can be applied.

Business Liquidation

If a business is no longer going to be operated, the sale price will reflect this. If a dentist has gone bankrupt and can no longer afford to stay operational, liquidation may be the absolute best path to take. This will include the business’ assets and what they are currently worth. The goal behind liquidation is to sell the business’ assets as quickly as possible. Typically, this is done by lenders or owners that simply want to recuperate some of the money that has been lost.
If a dental office has not been profitable, this will be the appropriate form of valuation.

Income Based

Practices that have a steady stream of income every year will find that income-based valuations are often best suited to their needs. This is a total value that is based off of current or future income estimates. Typically, a capitalization rate is reduced from the total cost based on income. The income value may or may not be multiplied by 3 or more years to determine how much the buyer will have to pay.

Income based valuations are a standard in the industry and are the best course of action for a business owner that must sell, but does not know where the begin. This figure will be very difficult to determine in certain circumstances because of the name a dentist has made for themselves. If a dentist’s name has been tarnished because of legal action, income based valuations may not be viable.

Market Approach

The market approach is used in areas where many dentists work. If there are 20 dentists in a 5 mile radius, chances are that they all are doing fairly well. This means that if they sell their practice, their final selling price can be applied to your business’ valuation. While there may be other factors to add or reduce this cost, this is a great starting point that will allow a person to determine the general ballpark figure that they can expect for their business.

Considerations That Need to be Made

Understanding dental practice valuations also comes with a lot of key points that a person must consider. These points can either raise the value of a business or cause the value to drop considerably.

Property:
If a building and property come with a dental practice and it is not in the form of a rental, this will have a very positive effect on the overall valuation of the practice. This will be of high value to any potential buyers.

Reputation:
A dentist’s reputation has to be considered at all times. A world-renowned dentist may have a slew of patients based on their name alone. While this may sound great at first, if all of the clients leave when the dentist resigns, it will be a major loss to income potential.

Future Income:
A dental practice may have seen tremendous growth since they opened their doors. This is growth that can be predicted in the future if it has been steady. If a business has seen 10 percent growth every year over the past decade, there is a very good chance that they will see growth following the sale of the business. These figures can add to the valuation price.

Training:
Oftentimes, training can be included in the sales price and may even add to the valuation of a practice. If the current owner is willing to work with patients for a year during the transition, the price of the practice may rise dramatically. This allows for a bit of security on part of the buyer.

There are many factors that will go into the total valuation price of any business. Since dentists work closely with their patients, their overall reputation will also need to be considered. Oftentimes, a “do not compete” clause will be added so that a dentist cannot just start up another practice in the area. Since many dentists are self-practicing, a lot of the business’ value is the owner themselves.

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