There’s more to dental practice acquisition than finding a practice for sale. Valuation ensures you get a fair price for your practice — whether you’re the seller or the buyer.
Finding a dental practice you’re interested in buying can be thrilling. Before you begin negotiations, you’ll want to know the value of the practice. Valuing a dental practice can be complicated, as the process itself is complex, and you may find yourself constantly stepping outside your comfort zone. And while dental school provides rigorous education on oral health, the curriculum doesn't always cover the business side of dentistry. That means a lot of practice owners need to become financially savvy on their own.
So what is valuation? Simply put, valuation is the process of determining a dental practice’s worth. Just as a home is appraised before it's purchased, a dental practice also needs to be appraised. A practice is multifaceted in that you’re not only buying a space and equipment but also inheriting an income stream, and you'll want to know if the practice has turned a profit.
Understand Valuation Methods & Terms
Zooming in on valuations gets tricky because professionals can choose from multiple methods when calculating value. Here are a few common methods:
- Asset method: Sums a practice’s net assets, both intangible and tangible
- Income-based (or earnings) method: Relies on cash flow to make up a large portion of a practice’s valuation
- Rule-of-thumb method: Accounts for goodwill — e.g., IP or brand recognition — as an intangible asset, which can be difficult to quantify
Some professionals seem to prefer one method over another for a variety of reasons. You should be made aware of the different methods available to you, and your professional team should be willing to explain the differences and components of each method to you.
As you get acquainted with these valuation methods, there are a few valuation terms that can be useful in fully understanding these methods. Here are a few common terms:
|Fair market value||What your practice would be worth given you’re interested in buying and someone is interested in selling to you or vice versa|
|EBITDA, or earnings before interest, taxes, depreciation, and amortization||A measure of profitability to income; is not a generally accepted accounting principles (GAAP) metric|
|Intrinsic value||A measure of an asset’s worth|
|Net book value||Cost of carrying an asset on your practice’s balance sheet|
|Balance sheet||Your practice’s assets, liabilities, and equity at a given point in time|
Assemble a Team of Professionals
Trying to parse the fair market value from the intrinsic value and the net book value can give anyone a headache. Thankfully, you’re not alone. There are professionals whose job it is to evaluate the fair asking price of a dental practice, and you’ll want to team up with dental practice appraisers who are tasked with performing practice appraisals on your team from the outset.
ADA Practice Transitions (ADAPT), a service of ADA Business Innovation Group, recommends a formal and an informal valuation, where the former uses generally accepted principles for business valuations, and the latter charges a fixed fee and stands to gain no additional revenue from a higher valuation.1 This is similar to fact-checking the valuation to ensure its soundness.
Your professional team should be willing to walk you through your valuation, either as the seller or the buyer. The value of the practice can help you identify an offer price, as well as tasks related to a future sale. For example, if you need to lease the space from the new buyer if they own the real estate and are keeping it as an investment.
It’s important to understand that an asking price isn’t necessarily reflective of the value. At the end of the day, a dental practice, like a home, is worth what someone is willing pay for it, regardless of its valuation.
Plan for the Future
There are tax implications related to practice sales, and tax laws often change. This is another smart reason to team up with professionals who can have your back during the valuation and beyond. Finally, as you consider the practice’s value, you may want to weigh its current value or price against the expense of future updates. What equipment, furniture, and computers may need replacing in the near future? You’ll want to make sure you’re choosing an investment that you can afford to maintain. And if you have a vision for growth, you’ll want to be able to plan for that as well.
Acquiring a practice can be an exciting step forward in your career. The logistics of valuation can be complex but made easier by teaming up with professionals — banks, CPAs, insurance — who also have a special knowledge of healthcare. Knowing you have a trusted team behind you makes it much easier to navigate financial decisions for your new practice but also ongoing ones.
Ready to learn more about dental practice acquisition? Check out the other articles in the series:
Ins and Outs of a Dental Practice Acquisition: 2 Types of Ownership
Ins and Outs of a Dental Practice Acquisition: Finding a Practice for Sale
Ins and Outs of a Dental Practice Acquisition: Understand Finance Options