Dental Practice Valuation: A Buyer’s Guide

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By Larry M. Chatterly, CTC Associates

A dental practice is worth exactly what someone will pay for it in the marketplace. This may sound like a cliché, but it is a fact.

A Buyer’s Guide to Dental Practice Valuation by Your Dental Practice Brokers

Currently, buyers of general dental practices are paying prices that range from 50 to 75 percent of the most recent 12 months’ collections. (This range excludes duress sales for death, disability, or health reasons. Studies show these sales average closer to 30 to 60 percent of the prior year’s gross.) Specialty practices typically sell for less. Circumstances surrounding each sale vary widely, from estate sales to partnership buy-ins. In general, healthy and active practices with fee-for-service patients and a strong new patient flow sell for more. Sometimes older practices, i.e., practices with older equipment, older patients, and outdated decor, bring less even though they often represent the best value for the money.

You may already realize that the value of a dental practice is really in the mind of the buyer rather than in the mind of the seller. Getting a seller to understand and appreciate this concept may not be easy. Perhaps the best way to illustrate this is by illustration: Suppose you are a physician. Assume you are looking to buy a medical practice consisting of the same revenues, overhead, and location as your neighbor, the dentist. What is your practice worth? You will find medical practices with identical revenues will sell for far less than their dental practice counterparts. Why? Young physicians beginning their careers simply do not experience the same level of competition for patients that young dentists experience. Without a specific need to plug into someone else’s patient flow, most young physicians can start their own practices or join a large group practice. In the dental field, however, there is much more intense competition for patients and therefore more value in practices with established patient bases. This is why the intangible assets of goodwill, patient records, and restrictive covenants are so important to a buyer and why up to 80% of the value of a practice may consist of these intangibles. The process of establishing and substantiating the true value of a practice is crucial to success. The wrong approach can lead to unfortunate results.

As previously mentioned, the intangible value of a dental practice may range from 60 to 80% of the total value. There is substantial value in goodwill, loyalty, trust, established relationships, perceptions, and covenants. Unfortunately, there is no simple formula for objectively evaluating these essential aspects of a dental practice, and yet these are the major items you, as a purchaser, need to buy. You can find newer, better, and less expensive equipment and furnishings just about anywhere. You may also be able to find a better facility or location, and a staff with better abilities. What you will have difficulty finding are the intangible relationships of goodwill and trust that a seller has spent many years developing with his or her patients. Out of those relationships of goodwill and trust come the financial rewards that you seek. That is why you will pay a considerable amount of money to access the revenue stream developed by the seller. And, despite the concerns of many buyers, the value of these intangibles will not diminish or leave the practice when the seller does because almost all patients are willing to transfer their trust to the buyer after having received a strong endorsement from the seller.

What you ultimately pay for a dental practice is entirely dependent on what you believe, how you feel, and in whom you trust. Be sure to pay attention to your gut feelings about the proposed transaction. If you feel good about the seller and the practice, and trust that the appraiser has been objective and can actually facilitate a fair transition, there is a high probability that you will want to pay the appraised value.

The person most qualified to appraise a dental practice is someone who has demonstrated the ability to transition dental practices and meet the needs and expectations of the parties involved. Remember, the dental practice appraisal is not worth the paper it is written on if the appraiser cannot back it up with a track record of successful outcomes for other purchasers. All too often unrealistic, ego-inflated appraisals and poorly structured transactions have created heartache instead of creating success.

The moral of the story: know with whom you are dealing. Ask lots of questions, and check references from both buyers and sellers, and consider using a broker-member of the National Association of Practice Brokers.