Posted on Jul 22, 2013
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Posted on Jul 22, 2013
Dental practice valuations can be confusing; sometimes it seems like there are a number of random factors both difficult to measure or even define when valuing a dental practice. Also, it can appear that you need a professor of economics to make sense of all the metrics involved in a thorough dental practice appraisal.
As funny as that might sound, it can be frustrating if you’re attempting to buy or sell a dental practice. The greatest measurement is: How much gross capital can the practice generate? That measurement is somewhat fluid as well because the ability for a practice to turn a profit is contingent upon both tangible and intangible assets.
Taking a look at those intangibles (such as community presence, patient loyalty, how well the office runs with existing employees, and how productive the vendor agreements) and tangibles (such as the state of equipment, the building itself, furnishings, and décor) are all a part of measuring the overall value.
Before you schedule a formal dental practice valuation, it’s advisable to solicit the assistance of a local dental practice broker. They can guide you whether you are buying or selling a dental practice. There are three primary ways of assessing dental practice value: 1) Market, 2) Income, and 3) Asset. Asset is often employed when the practice is newly-opened. This is a less frequent circumstance so for the purposes of this article, we will focus on what to consider when looking at a value from a market or income standpoint.
Let’s begin by looking at the market as a means to measure the value in a dental practice. Most of us are familiar with the concept of market-value measurements because the most common method utilized to assess residential real estate. This tactic studies similar dental practices in the area and observes recent sales to get a sense of what a dental practice is worth.
There is often a “typical” formula to determine value in a market-value approach. For example, your NAPB dental practice broker most likely will pull sales prices of practices that have similar annual revenues to the practice in question in order to gauge market value.
For instance, Practice A has an average annual practice revenue of $700,000, and most practices in the area sold for 65% of their annual revenues. Therefore, the price for this Practice A is $455,000. Practice B has an average annual practice revenue of $850,000. If it sold for 65% of the annual revenue, the list price for Practice B would be $552,500.
So, with the practice in question, to determine the market value we start by finding out the average annual revenue. If the practice in question has an average annual revenue of $775,000 and it’s listed for $503,750, that’s a fair market price.
Easy enough, right? But what about income value? How does that play into the dental practice valuation? In Part 2, we’ll look at income value as a means of valuing a dental practice.