Expert Guide to Dental Practice Valuations (Overview + Tips)
Dental practice valuation estimates your practice's total net worth based on its assets, liabilities, goodwill, and future projections. As a dentist, you need the help of a seasoned merger and acquisition expert in selling your dental practice and getting the best value out of it.
Read through this comprehensive guide to solve all your doubts about how to sell a dental practice and the aspects to consider along the way.
Quick Answer: How do you estimate the value of a dental practice?
Like any other business undergoing a merger or acquisition, the value of your dental practice is calculated based on the assets, liabilities, and growth projections. In simpler terms, it's all about how much money your practice makes, any debts/expenses, and whether it will be profitable for the acquirer in the future.
Here are the major factors involved in estimating the value of a dental practice:
Value of the assets owned (real estate size and location, machinery/equipment, office decor).
Revenue model (one-time, subscription-based, joint-ventures, etc.).
Reputation and customer base, which define brand value (goodwill).
Patient retention rates and historical data on it.
Potential for growth in the near and distant future.
Reason for selling your dental practice.
How much do dental practices sell for?
A dental practice can sell for 50% to 80% of its annual revenue numbers. However, the exact number of how much a dental practice is worth depends upon the dental practice valuation method used for evaluation.
The most common evaluation method considers the average EBITDA for a dental practice, which signifies its net income. It gives a dental practice valuation multiple, usually 1x to 2.5x of the annual profit.
Read further to learn about the different evaluation methods in detail.
How long does it take to sell a dental practice?
In our experience, six weeks is the quickest duration to sell a dental practice. However, in many cases, the actual duration ranges between six months and up to a year, depending upon the size of a dental practice and the due diligence of the involved parties. It would be best to opt for a consultation to better understand how much time it will take you to sell your dental practice.
Dental Practice Valuation Methods
Dental practice valuation methods can be classified mainly into three different types:
1. Income-based valuation method
Income-based valuation is one of the most used dental practice valuation methods and relies upon future income projections. It takes into account the actual net income (revenue minus expenses) of your practice over the past one to three years to calculate an average.
The valuation of your practice can stand at 1x to 2.5x, or even 4x times the income. It is further divided into two valuation methods, and one or both of these can be used to calculate the final valuation. These are:
EBITDA-based Valuation Method
It is calculated based on the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), also known as the net income. Dividing your last year's net income with the market capitalization rate for your industry yields the valuation of your business. In the case of dental practice, the market capitalization rate falls between 25% to 31%.
Discounted Cash Flows Method
The discounted cash flow method evaluates the future growth potential of your business. It projects your practice's income over the coming ten years, adjusting the value of money over the future. Calculations under this method are complex, and you should seek help from a dependable merger and acquisitions expert for it.
2. Market-based valuation method
Market-based valuations consider the historical data for previously completed dental practice sales in your region. It works best when your dental practice is located in an area with sizable competition and previously closed deals, giving accurate data for reference.
The final valuation is based upon comparison and is influenced by factors such as the size and location of your clinic, footfall at your clinic, and reputation in the area.
3. Asset-based valuation method
Asset-based valuation determines the value of your dental practice after appraising the value of all tangible and intangible assets. Tangible assets include owned physical items like electronics, machines for diagnosis and treatment, furniture, etc. However, since a big part of the value of a dental practice is intangible, this method is not the most accurate for dental practice evaluations.
What is the average dental practice profit margin?
The profit margin in a dental practice depends upon factors like location, patient demographics, and type of services offered. However, dental practices have an average margin of 30% to 40% if you own the real estate for the clinic.
What is the average dental practice revenue?
According to a report from the American Dental Association, the average gross billings for dentists in 2022 was $830,840 for general practitioners and $1,141,780 for specialists.
How to Value a Dental Practice - Step-by-Step Process
Here's an overview of the step-by-step process of how to sell a dental practice.
1. Gather necessary records and financial statements
The first step for dental practice valuation is to gather the relevant documents. Here is a general overview of what you will need:
Financial statements for the past three years for your dental practice. It includes profit-loss statements, tax computations, balance sheets (current and previous), A/R reports, and expense records (salary/commission compensation formulas, electricity, consumables, etc.)
Detailed lists of equipment and their depreciation schedule
Thorough records of all previous transactions
Ownership and stakeholder documents
List of insurance plans
Details of employees and copies of all existing contracts
Details of total active patients and changes in their number for the past 12 months
Intellectual property documents (patents, trademarks, websites, etc.)
2. Consult with a dental practice broker or appraiser
Once you have gathered the documents, the next and most crucial step is to contact a dental practice appraiser. It is helpful in many ways as the appraiser will evaluate the exact value of your dental practice.
Never try to appraise your dental practice yourself because you will miss out on many factors - you are a dentist, not a finance expert.
A valuation expert helps you understand your dental practice's current and future financial projections. It will help you set the right expectations for the price and make informed decisions.
3. Assess both financial and non-financial factors
Before you make the final approach to selling your dental practice, look closely at the usual factors that can impact your valuation and decision. These can include:
Any latest technology or unique service that can enhance the value of your dental practice deal.
Having well-trained staff that is ready to work with the acquirer is a plus.
Assessing relations with your providers and patients to rule out any chances of future conflicts.
Analyzing if there is fierce competition near your location.
Sample Dental Practice Valuation
Let's understand the outcomes of dental practice valuation using income-based valuation methods to understand the subject.
Suppose your dental practice brings in $500,000 for the last year in net income (EBITDA) at a profit of 30%.
The net profit made by your practice is $150,000, and at a cap rate of 30% (using the capitalized earning method), the valuation of your dental practice is $150,000 divided by 30%, which comes out to $450,000.
Dental practice valuation calculator
The valuation of a dental practice will depend upon the revenue numbers and goodwill.
Use our free dental practice valuation calculator before you hire a dedicated dental practice merger and acquisition expert. It gives you a free report on how much your dental practice is worth. You can also opt for a paid custom report, which includes a one-hour consultation with a valuation expert.
How to value dental practice goodwill
70%-80% of the value of a dental practice is intangible, and its most essential and significant component is goodwill. The success of a private medical practitioner largely relies upon their goodwill with the patients. Since patients like visiting the doctor, they can trust them. A dental practice with high goodwill will fetch a significantly larger valuation.
These are a few aspects that can help evaluate the goodwill of your dental practice:
Consider how long you have been a dental practitioner in the exact location. The longer, the better.
A significant number of repeat patients indicates goodwill in dental practice. Plus, do your patients recommend others to visit your clinic?
Do you have reliable, experienced staff willing to stay after you sell your dental practice?
4 Factors to Consider When Selling Your Practice
Keep these considerations in mind when selling your dental practice.
Revenue and profitability metrics
It is usually an excellent time to sell if your dental practice is already doing great and you have incredible profitability numbers. If your revenue numbers are uptrend, the projected value will be high, resulting in a better deal for you.
On the contrary, if your finances are not looking great, it is a good idea to wait and make improvements if you are not looking to cash out instantly for other reasons.
Patient base and demographics
Dental practitioners with an extensive and loyal patient base command a higher valuation than their competitors. Additionally, the patient's demographics, such as their age group and income levels, play a significant role in valuation.
Again, evaluating your current patient base and looking for improvements is best if you can spare some time before negotiating a deal.
Equipment and technology
Use the latest technology in your dental practice that makes you stand out from your competitors. Having state-of-the-art equipment improves productivity as well as credibility among your patients. Additionally, a potential buyer will look for equipment in good working condition with low depreciation in the current state.
Deal Negotiations
Getting help from a certified mergers and acquisitions expert in dental valuation is crucial to negotiate the right deal and get the most out of it. Factors such as the transfer of intellectual property rights (patents, websites, social media following) can be overlooked, resulting in you leaving money on the table.
Frequently Asked Questions (FAQs)
Check out this FAQ section for answers to some common queries about how to sell a dental practice.
What is the rule of thumb for valuing a dental practice?
A general dental practice valuation rule of thumb is that the final valuation is 1x to 2.5x of the net income or 0.6x to 0.8x of the total revenue. Plus, 70%-80% of the value of your dental practice comes from goodwill.
Who pays for the dental practice valuation?
The seller of the dental practice pays for a valuation because the seller needs to get a hands-on report to present to the potential buyers.
How much does a dental practice valuation cost?
A dental practice valuation costs between $2,500 to $30,000 or sometimes even more, depending upon the complexity of the valuation and scale of the dental practice.
Conclusion
Selling a dental practice requires due diligence to ensure that the buyer gets the right value and the seller doesn't leave money on the table.
The best route to 100% success in such deals is to hire dedicated dental practice merger and acquisition experts. The right team helps you gather all relevant financial data and future projections, ensuring you do not miss any detail.
Book a consultation with ExitWise, and we will help you assemble the dream team of dental practice valuation experts to seal the deal.
