Dental Practice Valuation

A dentist at work

You’ve worked hard for years to make your dental practice a thriving business. When the time comes to sell your practice, dissolve your partnership, or welcome a new partner into your practice, evaluating your dental practice becomes an integral part of the process. Determining an accurate valuation of your dental practice can help you obtain a fair amount of compensation.

Dental practice valuation is a complex and crucial part of buying or selling a dental practice. If you own a dental practice and you’re considering selling your practice, you’ll benefit from working with an experienced legal professional like Mahan Law. Our skilled attorneys understand what it takes to successfully buy or sell a dental practice. We will help you carefully evaluate and appraise your dental practice and pursue a fair price. 

How to Value a Dental Practice

Several methods are commonly used to value healthcare organizations, including dental practices. If you sell your dental practice, you may want to value your business using one or more of the most common valuation methods. After determining the value of your dental practice, you can use the average of the three methods as a baseline. 

The dental practice valuation process isn’t always straightforward because every dental practice is unique. At Mahan Law, we will carefully consider all of the unique aspects of your dental practice when working with you to find a fair valuation number.

Specific Factors to Consider When Valuing a Dental Practice

When determining the fair market value of a dental practice, it’s essential to use a comprehensive method. Considering all the elements that go into managing a successful dental practice can help you accurately value your practice. For example, all of the following factors can contribute to your dental practice’s fair market value:

  • Whether there are opportunities to grow and generate larger profits in the future
  • The dental practice’s annual revenue and gross income
  • The value of the equipment and its general condition
  • The number of employees on staff at the dental practice
  •  Whether the dental practice has a positive reputation among patients and members of the community
  • Whether the property is in good shape and the potential costs of important renovations to the building and facilities by the new owner
  • The retention rate of existing dental patients
  • The dental practices strategy for attracting new patients
  • The patient base of the dental practice compared to others in the same geographic area
  • The amount of income the dental practice generates yearly after taxes and deductions
  • Whether or not the market is saturated with too many dental practices in the surrounding area
  • Whether the current owner has made improvements to the physical dental office 

The Discounted Cash Flow Method of Valuing a Dental Practice

The discounted cash flow method of valuation involves calculating a dental practice’s value based on an estimate of its cash flow in the future. This process involves estimating a dental practice’s net income over the next ten years. 

After determining the net income, the total amount should be adjusted for the time value of money. There are some limitations to using this method. It’s impossible to predict future cash flow estimates accurately. Economic changes, insurance regulations, and other factors outside of a dental practice owner’s control can affect the cash flow over a 10-year time frame.

The Income-Based Practice Valuation Method

Dental practices’ cash flow is one of the most important factors to consider when valuing them. A company’s cash flow includes the value of payments transferring in and out of the company, making up a significant portion of the company’s total valuation. Many dental practices calculate their market value based on their expenses and revenue. 

This valuation method determines income, which includes a dental practice’s earnings before taxes, interest, and depreciation amortization. The income amount can be calculated using a practice’s capitalized profits or discounted cash flows. Many people value a dental practice at two to four times its income figure. 

The Capitalized Earnings Method of Valuing a Dental Practice 

The income-based model for valuing healthcare companies is the most popular method. This method examines the value of a dental practice’s anticipated profits by reviewing its current net earnings. These figures are used to predict the dental practices’ performance in the long term. First, the net present value must be divided by a capitalization rate to determine the practice value. The rate ranges between 15 and 30 percent.  

Smaller dental practices generally use rates between 20 and 25 percent. This type of valuation method has limitations. As with the discounted flow method, the capitalized earning method relies on predicting future earnings. If the dental practice is relatively new, more data may be needed to predict future earnings. 

The Market-based Approach

The market-based approach involves comparing a dental practice with similar practices in the same geographic area. This method is similar to real estate valuation methods because it relies on valuing other similarly situated dental practices. After determining the market value of a few similar dental offices, you can make adjustments for differences in office size, patient load, and reputation. The market-based approach has limitations, mainly because it needs to consider estimates of the dental practice’s future financial success.

The 80 percent rule states that approximately 80 percent of the valuation of the dental practice is from goodwill. This method is one of the least data-driven methods because it’s based on an intangible asset, goodwill. Goodwill can include the staff and dentist reputations as well as the dental practice status in the community. One of the benefits of purchasing an existing dental practice is to enjoy the existing goodwill a dental practice has built up over time. 

Contact a Dental Practice Valuation Attorney

Dental practice valuation is one of the most important aspects of buying or selling a dental practice for a fair amount. Don’t hesitate to contact the experienced attorneys at Mahan Law to discuss how we can help you accurately and fairly value your dental practice during a complimentary case evaluation.