Once you’ve decided to transition your dental practice to another owner, getting a dental practice valuation is the first step in the process. Your practice valuation impacts the entire dental practice transition process so it is important to do your due diligence and find a broker with expertise in valuations. An expert dental practice valuation is a detailed review of all aspects of your dental business. It will disclose your practice’s strengths, weaknesses, and enable your consultant to know what transition method is practical for your transition and which would not succeed at all.
An accurate valuation ensures the seller gets a fair price for their practice, but it also ensures a buyer is getting a good value. For purchasers, a proper valuation will determine something much more important than just the price. The valuation provides information such as the cash flow of the practice and what the buyer acquires in a purchase. Can the next dentist accurately expect to make a profit? What machines and tools will be included in the sale of the dental office? These are some of the many questions that should be answered with a proper valuation.
A competent valuation will consider the three approaches to value – The Asset Approach, The Market Approach, and The Income Approach.
The Asset Approach is a method based on the market value of the parts and pieces of the practice – the equipment, supplies, records, goodwill, and so forth. This approach is seldom (if ever) used for an ongoing practice with a successful cash-flow. Still, this approach can be used on immature start-up practices or in the event of a seller’s death when the patient flow has all but stopped.
The Market Approach is the standard method for valuing real estate. We examine comparable practices (region, type, size, etc.) that have sold and consider the price vs revenue as a percent. This is the approach most sellers and purchasers are aware of and tend to rely on. The flaw with this approach is that it provides no forecast for a purchaser’s financial success.
The Income Approach determines a price based on an evaluation of current practice income minus practice expenses plus how much a purchaser should be paid for providing patient treatment. This method provides a measure of what price a practice could sell for and still be financially successful for the purchaser.
Ultimately, it’s up to the experience and judgment of the valuator to determine which valuation method to use for your dental practice. No matter the method, valuations aren’t a clear-cut practice. The best calculation a valuator can make is an estimate of the fair market value of a practice based on their experience.
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