How To Value a Dental Practice
Whether you’re looking to buy or sell, knowing how to value a dental practice is important. Working with a consultant like Tooth & Coin is the best way to truly understand the value of a practice. But how are these values determined in the first place? Let’s take a look at the top 3 methods of valuing a dental practice now.
Net Asset Valuation Method
The Net Asset Valuation Method is simple. You just add up all of the tangible and intangible assets of a practice, and the result is its value. This would include tangible things like real estate, office equipment, computers, and dental technology.
But it would also include intangible things like loyal patients, the office’s reputation, trademarks, patents, and other such things. Naturally, it’s hard to put a number on these intangibles, which is why the net asset valuation method is often not the best choice for dental practices.
Market-Based Valuation Method
This method focuses on the collections of the office when it comes to value. It’s a little more complicated. But basically, you take the historical collections of the practice over the last few years, and then you multiply it by a collections multiplier, usually ranging from 60% to 80%. It also takes local market data into account, so you’ll consider the value of other practices that were recently sold in your area.
Again, this is a pretty simple method, but it has a drawback. It only considers collections, not profits. So if a practice has lots of patients and makes a lot of money but is not very profitable, this method would overvalue it by quite a bit. It also is harder to use this method if you’re in a more rural or isolated area where few practices are bought and sold each year.
Income-Based Valuation Method
There are two different methods that use a practice’s income to appraise its value. These are typically the best and most accurate ways to value a practice and determine its fair market value. They are as follows:
- Discounted cash flows – In this method, you forecast the practice’s total net income for the next decade, and you use special calculations to determine how much that income is worth right now. After that, you subtract the assumed cost of capital, as well as a risk premium. This usually reduces the income value by 23% to 31%. The result is the value of the practice.
- Capitalized earnings method – This is the most popular valuation method. It uses the past year or several years of earnings, which are divided by a “capitalization rate” that ranges between 15% and 30%. The result is the fair market value of the dental practice.
If You Need To Value A Dental Practice, Turn To The Experts!
Dentistry is complicated, and so is valuing a practice. Whether you’re selling your own practice or you’re looking to invest or expand in a new practice, you need to work with a pro. Every practice is different, and the proper valuation method may vary.
So don’t go it alone. At Tooth & Coin, Jonathan VanHorn and our team are here to help. We’re experts in valuing dental practices, and can provide you with an accurate estimate of a dental practice’s fair market value. Schedule a consultation online or give us a call at (877) 265-2121 to get started today.