Before buying or selling a dental practice, you’ll need to arrive at an accurate valuation for the business.
As a seller, the valuation process helps you set your listing price and empowers your negotiations. As a buyer, valuation ensures that you don’t overpay while attempting to expand your practice.
Dental Practice Valuation Factors
Determining the proper valuation of a dental practice involves the analysis of several factors. These include:
- Existing assets
- Outstanding debts and liabilities
- Current business size and projected revenues
At Duckett Ladd, we’re a team of financial experts dedicated 100% to the dental industry. We’ve helped countless dental professionals to determine an accurate valuation prior to the purchase or sale of a practice.
Today, let’s review the essential considerations for dental practice valuation.
1: Existing Assets
A dental practice’s assets include the office’s property value, existing dental equipment, and any other materials that are owned by the business. The sum of existing assets forms a baseline price tag for the practice.
Geographic location and the quality of the building are major factors.
An attractive and well-maintained property in a populated city’s downtown or Main Street setting will be worth substantially more than a similar office located on a country road. Simply put, locations closer to higher population centers receive more exposure by foot and vehicle traffic alone.
The condition and quality of the practice’s equipment are also considered during valuation. Equipment that can be included in the sale and used by the new owner can boost the practice’s value considerably.
For sellers, it’s wise to consider upgrading some equipment before listing a practice for sale. The boost in value from having a full new equipment set may be well worth the upfront cost.
2: Outstanding Debts and Liabilities
Debts and liabilities can drag down a dental practice’s valuation.
However, the impact of debt on valuation is largely determined by who the debt will belong to after the transaction occurs.
For example, debts in the dentist’s own name may not transfer to the practice’s new owner. Instead, the current owner may plan to pay off these debts with the money earned from selling their practice.
If there are debts attached to the business itself, these are often transferred to the new owner. In this case, the practice’s valuation is lowered accordingly.
3: Current Business Size and Projected Revenues
Larger dental practices typically have more square footage, more equipment, and more staff and patients. Each of these factors is reflected in the practice’s valuation. Large practices often carry a proven record of success that’s attractive to buyers.
Obviously, as a seller or a buyer, it’s preferable to be dealing with a profitable business. Along with a strong assets/debt standing, a profitable business comes with an expectation of continued success.
You might value a practice by calculating its annual revenue and multiplying by a factor that represents continued revenue growth.
You can also use a price-to-earnings ratio to determine a business’s value. For example, if the P/E ratio is 10 and the business is projected to earn a minimum of $1 million per year, you could set the baseline value at $10 million.
Tips for Generating the Most Value for Your Business
Selling a business is complex, but you’ll enjoy the best possible sale price by following these key guidelines.
Pay off debt. Prioritize paying off as much debt as possible before listing your practice for sale. This improves your potential sale price, simplifies the sale transaction, and makes your business more attractive to buyers.
Hire an appraiser. Work with an appraiser to determine the real estate value of your office building and property.
Upgrade your equipment. If possible, upgrade all or a majority of your old equipment so that you can include new equipment in your sale.
Perform financial analysis. Work with a financial consultant to determine the projected revenue and profitability of your business over a period of time. Use this information to set your sale price.
Work with a Dental Financial Consultant to Determine the Value of Your Business
Duckett Ladd is a team of financial experts dedicated exclusively to the dental industry. If you’re buying or selling a dental practice, we can help you achieve your growth or retirement goals.
To learn more, contact Duckett Ladd today.