If you are thinking of selling your dental practice, determining an accurate valuation of your practice will be critical. This should be done well in advance of putting your practice on the market and meeting with potential buyers. Getting to an accurate figure for your practice’s value can be somewhat challenging and there are a number of options that are commonly used in calculating the value of dental practice. We’ll take a closer look at some of those methods here.
How to Calculate the Value of Your Dental Practice
In some cases, dental practices simply use a standard rule which takes 70% of the practice’s gross value as the practice’s sale value. While this may work for some practices, it can fail to take into account a number of different factors which can have a big impact on the valuation of a dental practice. After all, there are a number of factors that play a role in the fair market value of a dental practice. The more factors that are taken into consideration, the more likely the valuation is going to be an accurate reflection of the practice’s value.
Some of the factors that can have a major impact on a dental practice’s value include:
- Gross income
- Net income
- Annual revenue
- Equipment condition
- Leasehold improvements
- Office location
- Real estate conditions
- Growth potential
- Patient retention
- Patient attraction
There are a few different valuation methods that are commonly used in the valuing of dental practices and some may work better in your case than others. Take the time to review the details, consider what makes your dental practice particularly valuable and go from there. In the meantime, here are a few of the valuation methods for you to consider for your own practice.
First, there is the income-based practice valuation method. This method bases the practice’s fair market value on its revenue and expenses. Essentially, it looks at the cash flow of the dental practice. The cash flow is the net value of the practice. It is the payments transferred into the practice minus thus going out. While other factors may then be considered in this valuation method, the net value of the practice forms the base of the analysis.
There is also the market-based valuation method. This method involves comparing the selling prices of other, similarly situated practices, in your area. It looks to the market value of dental practices in your region and then makes adjustments based on variances between your practice and the other practices. Adjustments may need to be made for things like patient load and the size of your office. In order for the market-based valuation method to be most accurate, however, there must be sufficient data available. This means that there must be enough sales data for comparable dental practices in your area.
The last valuation method we are going to look at is the net valuation method which totals the net value of a practice’s tangible and intangible assets. Tangible assets include things like real estate and equipment. Intangible assets include things like intellectual property, reputation, and patient loyalty. As you may have surmised, the real challenge with this valuation method comes in trying to accurately assess the value of intangible assets.