There are several methods that are used by appraisers to determine the fair market value of a dental practice. While some methods are favored over others, all of the methods arrive at an estimated value that is an acceptable reflection of a particular practice’s market value and what a prospective buyer might pay for it. Following are some of the dental valuation methods that are commonly used by appraisers.
Many appraisers use the rules of thumb method to determine fair market value. This method requires determining generalizations in the current dental market and what can be expected to happen in the future. To project future expectations, the market data is continually collected and evaluated until a trend emerges that shows whether the dental industry market has been declining, increasing or remaining even. When using this method to valuate a general dental practice, the market for that type of practice must be determined rather than a broad range of different types of dental practices. The result is a generalization, rather than a reflection, of the actual value of the practice and its future earning capacity.
The market approach is a valuation method that compares a specific practice with other practices of the same type that have already been sold. The information gained from this type of valuation must be adjusted to take into account variances in the different practices. For example, if one practice has two dentists and the practice being valuated only has one, the valuation will need to be adjusted to account for that difference. Other considerations of the practice that was sold include the type of practice, the age of its equipment, capitation revenue and practice location. That information would then need to be compared to the practice being valuated. Another market approach that can be used involves finding the ratio between a practices sale price, its discretionary cash flow and its annual net profits or annual revenues. This method does not take into account the age of equipment or practice location.
Capitalization of earnings is another valuation method. This formula is used, for example, to calculate whether an investor who hired a dentist and other staff to run the practice could expect a return on his investment. The goal is to determine the future projected cash flow of the practice. Using this method, the income and expenses of the practice are adjusted to determine the actual operating expenses, the cost of the debt to purchase the practice and the capitalization rate. The capitalization rate is arrived at by taking into consideration the current economic market conditions and the outlook for the dental industry to determine estimated future income. Capitalization rates generally range from 18 to 35 percent. Higher percentage rates indicate a higher risk in purchasing that particular dental practice.
Determining the fair market value of a dental practice is a complex process, and there is no universal standard that is used to arrive at a value. Appraisers are free to use whichever method they prefer. ADS transition specialist are adept at analyzing current market conditions and providing the most accurate valuation possible.
