AUTHOR: The Dental CFO
May 15, 2023
Every day you step into your practice, you’re working on one of your largest assets.
The valuation of your dental practice office plays a significant role in your net worth. Knowing your small business valuation is critical because it directly impacts your ability to sell your practice. And that transaction has implications for your personal life beyond dentistry.
Unlike other wealth-building tools, such as real estate and investments, you have much more influence on your business valuation. External market factors aside, the work you do to build a patient roster, update your equipment, and run an efficient operation can increase the value of your practice.
And when you decide it’s time to sell, having an accurate valuation cannot be understated. The selling price of your business will directly affect your retirement plans, family, and any business ventures you want to pursue.
As a dental practice owner, you may wonder what a realistic valuation of your business looks like. Maybe you’ve used business valuation calculators to get a rough estimate. But determining the selling price of your business isn’t always straightforward.
There are multiple valuation methods and many different factors that can affect your dental practice valuation. To learn more about them, keep reading.
What Is a Valuation?
Let’s start by defining what the word “valuation” means. In short, it’s the market price for your practice. It’s a way to put a purchasing price on the business.
Determining a business valuation involves a systematic approach that looks at many different aspects of your company, like:
- Gross revenue
- Net revenue
- Operating expenses
- Overhead costs
- Patient roster
- Business potential in your market
- The practice’s goodwill
Knowing your business valuation puts vital information in your hands to make the best decision when you’re ready to transition away from your practice.
Determining the value of a business is very different from establishing a real estate valuation. External factors, like market conditions and interest rates, drive real estate prices. While the market plays a role in determining the valuation of your practice, there’s more emphasis placed on your finances and the forecasted potential of the business.
Why Is It Important to Know My Business Valuation?
You’ve spent years building, managing, and growing your dental practice, and exiting the business by selling it may be your retirement plan. Or maybe you want to sell your practice to explore other business opportunities.
Obtaining an accurate business valuation has a significant impact on your business and personal life.
In a perfect world, the business sale process will happen when you find the ideal buyer, and the negotiation process moves at your pace and time frame. But in reality, it likely won’t work this way. You could be approached at any time about selling your practice. Knowing your valuation will help you be prepared if you receive an offer before you plan to step away.
Another essential thing to know with a valuation is that selling a practice doesn’t happen overnight. It can take months or even years for terms to be agreed upon. Selling a dental practice is unique. You don’t put up a FOR SALE sign in the window and expect people to show up wanting to check it out.
The selling process involves an in-depth look at your practices’ financials and data. So, determining your business valuation long before you plan to sell can help you identify improvement areas.
Maybe you’re still working to pay off a loan you used to start the business. Debt will impact your value, so working to eliminate your financial obligations or make enhancements to your business can positively affect your business price.
Like running and marketing your dental practice, working on your valuation is a strategic and long-term process. And a proper valuation can also help you with post-practice planning. The thing is, you won’t walk away with the total cash amount of the sale price. You’ll owe taxes, possibly brokerage fees, and other costs.
By getting a realistic valuation, you can see how much money you’ll earn from the sale and how that affects your lifestyle once you’re no longer a practice owner.
Factors That Help Determine a Dental Office Valuation
The financials of your business will be front and center when determining a valuation. Your receipts, revenue, expenses, tangible and intangible assets, and payment structure will all be scrutinized. In addition, your practice’s previous years and future projections will be examined.
An accurate valuation also includes other factors in your business. For example, your patient roster will be reviewed and analyzed based on age and demographics. Your churn rate and how many new patients you’re adding are also important.
The services you offer play a role in your business valuation, especially if you offer specialty services. These business lines will be studied to see which are most profitable and how your exit will affect the specialized procedures. Even the dental equipment you have is part of the process. Is it up to date or will it need to be replaced soon?
Buyers will look at external market data and see if it’s a good environment for long-term success.
How to Calculate Valuation for a Dental Office
Several methods are used to determine business valuations. Like practices themselves, each method is unique and designed for a specific scenario. There’s no one method that offers the most accurate valuation. Many advisors suggest using multiple methods to arrive at the correct number.
Here are some typical business valuation methods used to determine dental practice value:
- Capitalized Excess Earnings: This method is income based and subtracts total collections from operating expenses and doctor compensation. It’s then multiplied by a capitalization rate between 15% and 30% to arrive at a valuation figure.
- Asset Value Method: Asset value method places valuation on the practice by accounting for all tangible assets (office and dental equipment, a building, etc.) and intangible assets (goodwill). Typically, a value is placed on each active patient based on current market conditions.
- Annual Net Receipts Method: This market valuation method uses a practice’s last three years of receipts to determine value. The valuation price is determined by multiplying a dental business’s annual receipts by a percentage, usually 50% to 80%.
- Average Annual Earnings: Average annual earnings factors in the previous three years of annual net earnings and compares your practice with others in the region. It’s similar to capitalized excess earnings but does not include physician compensation.
Work With The Dental CFO to Get the Most Out of Your Business
We covered several business valuation methods. Each one has advantages and disadvantages, and there’s no catch-all formula to get the exact value for your practice. That’s why working with professionals who understand the dental business and offer business valuation services is so important.
Our team of CPAs and CFO-level experts know how to assess your practice’s valuation. We can work with you to determine your business worth and create a plan to help you maximize it when you’re ready to sell.
And since we’ve been involved in many practice transitions, we can walk you through the process. We want the best outcome for you and your business.
Selling your dental practice can take years. It’s important to have an advisor you trust to help you with the pre-selling process and be with you once negotiations begin.
Understanding your dental practice valuation begins with a free consultation. Reach out to our team, and we’ll tell you more about our comprehensive set of services.