Dental valuations are relatively complex processes, and dentists can easily find themselves paying thousands of dollars to valuation companies when they want to determine fair market value. It is therefore important for dentists to have a better understanding of dental valuation before they make any commitment. They must understand the advantages and limitations of valuation reports and how to select the best valuation expert.
One of the factors that complicate dental valuation is the absence of a standardized formula that is universally accepted for establishing the respective values of dental practices. The dental industry includes many objective factors and non-quantifiable subjective factors that professionals should consider when making dental valuations. Some of the subjective factors are unique to particular specialties within the industry. Mere checking of some facts and figures does not suffice to determine the true value of any practice.
Dentists must work with trusted advisers who have sound knowledge of and experience in dental industry if they want to get useful and reasonable valuation of their dental practices. There is need for close cooperation among all team members, including the dentist’s financial adviser, accountant and lawyer. All the team members should have a good understanding of the dental industry in general and challenges, earning potential and value of dental practice in particular.
Good dental valuation involves more than analyzing numbers. The valuation professional must understand the major components of growth and profitability in a particular dental practice in addition to the peculiarities of a given dental specialty. These factors do not only include the location of practice but also age of the dentist.
A variety of methods may be used to perform dental valuation but they fall into three broad categories.
This method is used to calculate the value of assets that a dental practice may sell. The assets may be valued depending on their original costs, book values that are reduced by depreciation, appraised value or replacement value.
One drawback to using this method alone is that it does not include earnings and overall cash flow of a practice. In addition, accurate calculation of the goodwill of a given practice is challenging. This is why the next two methods are also important.
Market Comparison Valuation
This method helps in identifying similar dental practices that have been sold. It uses some ratios of the recent sales to the subject practice, including annual revenues, annual net profits and discretionary cash flow.
Although recent sales of similar dental practices provide good valuation of a given practice, it does not consider unique features of that practice, which make it different from any other.
his method is used to identify expected cash flow of a particular dental practice and then multiply, discount or capitalize it based on one of these methods:
- A multiple of discretionary earnings valuation
- Capitalization of excess earnings valuation
- Present value of the future earnings
Many professionals opt for this method because it factors in many critical components involved in the success of a practice.