It goes without saying that the sale price is a critical factor to consider when either buying or selling a dental practice. If selling, you want to be sure that your asking price is competitive and can be backed up when potential buyers come inquiring. When you are looking to buy a dental practice, one of your first questions is going to be about how much a dental practice you are looking to buy is actually worth. Whether buying or selling a dental practice, it is important that you understand what goes into determining a fair purchase price of a dental practice.
A Fair Purchase Price for Buying a Dental Practice
Determining the fair purchase price of a dental practice is no small feat. In fact, professional appraisers and dental brokers are often retained in order to generate a formal opinion on the fair market value of a dental practice. During the valuation of a dental practice, many different factors will be taken into account, such as:
- Gross income
- Net income
- Number of active patients
- Number of new patients per month
- The practice’s goodwill and community standing
- Patient demographics
- Area demographics
- Practice in-house specialties
- Services offered
- Accepted forms of payment
- Accepted types of insurance
- Potential issues in the market
Even looking at each of these factors can make a person wonder how to come up with a number value after weighing everything. In fact, there are a number of different methods employed in order to provide a valuation of a dental practice. For instance, the net asset method uses an appraisal of the practice’s tangible assets and intangible assets to reach a total value of the practice. Tangible assets would be things like office equipment, real estate, and technology. Intangible assets would include things like the goodwill of the practice. The problem with this valuation, however, is the difficulty in effectively valuing the practice’s intangible assets. This is why the value reached in the net asset method is often used only as a point of reference to compare the value arrived upon using a different method.
The market-based valuation method is another commonly used method in order to determine the fair purchase price of a dental practice. With this valuation methods, the amount that the practice has collected in the past is taken into account as is the price point of other dental practices in your area. It can be difficult to effectively use this valuation method if the dental practice is not located in a more metropolitan area because there would likely not be much data available on the market prices of other practices in the area. Furthermore, this valuation method is often criticized because it is based so much on the practice’s collections as opposed to its profits.
The most favored method of valuing a dental practice is perhaps the income-based practice valuation method. This method bases its value determination mainly on a practice’s capitalized earnings or cash flow minus certain discounts. Valuing a practice based on its cashflow probably makes the most sense and this is why it is so often used to establish a practice’s fair market value.
Dental Law Attorneys
Looking to buy a dental practice? Looking to sell a dental practice? Make sure you get a fair market value of the dental practice’s price. Mahan Dental Law can help you with this. Contact us today.