There are times during the life of a dental practice when its owner or partners may need to establish its monetary value, a process that requires experienced analysis and advice. Knowing the value of a dental practice is an essential consideration for practice owners as they make strategic business decisions, such as whether to sell the practice to another dentist, buy in or cash out partners, or obtain financing. As such, it’s important to get this information right, which is why it’s a good idea to get legal help at this critical juncture.
If this is a juncture you’ve found yourself at, turn to the legal team at Mahan Law for guidance and support through the valuation process. Contact us today for an initial evaluation to learn more about the importance of dental practice valuations and how we can help you protect your and your business’s financial interests and lay the groundwork for a fair outcome to a prospective transaction.
Understanding Practice Valuations
For a professional practice like a dental practice, the business will have a monetary value that represents the total value of the practice. A practice valuation may represent the dollar figure another party might pay to purchase the practice from its owners. A dental practice’s value will include several components, such as the assets the practice owns (e.g., real estate, equipment, accounts receivable), the “book of business” represented by the practice’s patients, and the practice’s goodwill. However, dental practices have unique, industry-specific considerations that can make valuing these practices different from appraising a value for other types of businesses.
What Makes Dental Practice Valuations Unique
Valuing dental practices involves unique considerations compared to valuing other kinds of businesses. For example, patient relationships comprise a considerable portion of a dental practice’s value. When one dental practice buys another, it may have little need for equipment or other tangible assets owned by the selling practice; instead, the selling practice’s patients may represent the business’s most valuable asset. Thus, dental practices can increase their value if they increase a buying practice’s retention of patients from a selling practice. Other factors can play a uniquely important role in dental practice valuations, including:
- The location of a practice and its patient base
- The reputation and skill of the dentistry staff
- Legal constraints on ownership of dental practices
Why Would You Need a Practice Valuation?
Dental practice owners may need to obtain a valuation for their practice for various reasons. Some of the most frequent reasons for obtaining a dental practice valuation include:
- Buying or selling the practice: Dental practice owners most frequently require practice valuations when buying or selling an existing practice. In a transaction, the buyer and seller may obtain independent valuations to help them negotiate a fair market value for the practice.
- Determining buy-ins/buy-outs: Dental practices with multiple partners may require a valuation when bringing in a new partner or cashing out a departing, retiring, or deceased partner. A practice valuation can help determine a new partner’s financial contribution to join the practice or how much the practice must pay to compensate a departing partner.
- Divorce and estate planning: When a dental practice owner gets divorced, their ownership interest may constitute a marital asset subject to division. A practice valuation will help determine the monetary value of the practice owner’s ex’s share of the ownership interest. This can help the divorcing couple negotiate how to compensate the non-owner spouse for their interest. Practice valuations can also help practice owners as they undertake estate planning by illustrating the total value of the owner’s estate.
- Financing: Dental practices may need valuations when seeking financing, whether lines of credit to help make up for shortfalls in cash flow or strategic financing to expand the practice or purchase competitors.
Key Factors in Determining Dental Practice Valuations
Some of the key factors that professional business appraisers use to determine dental practice valuations include:
- The practice’s tangible assets: A dental practice’s tangible assets include real estate (the building or buildings that house the practice), dental equipment and materials, and dental care inventory for sale to patients.
- The practice’s intangible assets: A practice’s intangible assets include things like patient relationships and goodwill/brand reputation. When buying/selling a dental practice, intangible assets become essential due to the value of bringing a selling practice’s patients into the buying practice.
- The practice’s financial performance: Appraisers valuing a dental practice will evaluate various aspects of the practice’s financial performance, such as the practice’s revenue, cash flow, and net income (profit).
- Market trends: Appraisers may also consider how broader market and economic trends affect a dental practice’s value, such as whether the community has a growing or shrinking population and the number of other dental practices in the area.
- Legal considerations: Finally, legal considerations like regulatory compliance can affect a dental practice’s value.
Common Practice Valuation Methods
To value a business like a dental practice, financial professionals may use one of three common practice valuation methods:
- Income-based approach: The income-based approach to valuation, also known as the income capitalization approach, appraises a business’s value based on its income. Under the income-based approach, an appraiser valuing a dental practice will estimate the practice’s future income/cash flow and convert that income to a present value.
- Market-based approach: Also called the market comparison approach, a market-based approach to business valuation estimates a company’s value by comparing it to the asking/sale prices of similar businesses currently on the market for sale or that have recently sold in the geographic region. For dental practices, the market-based approach will look at the sale prices of similar practices that have gone on the market or recently sold in the same geographic area.
- Asset-based approach: In an asset-based approach to business valuation, an appraiser calculates the business’s worth by determining the fair market value of its tangible and intangible assets and subtracting its total liabilities.
Contact Us Today for Help with the Process of Valuing Your Dental Practice
Do you need to establish a valuation for your dental practice? Whether you want to sell the practice, bring in or cash out a partner, or secure financing, having experienced advisors can help protect what you’ve worked so hard to build. Contact Mahan Dental Law today for an initial consultation to learn more about valuing dental practices and discuss how our firm can support you through the valuation process.
