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How Goodwill Factors into the Purchase Price When Selling Your Dental Practice

When it comes to selling a dental practice, it’s important to consider its price, determined by both the marketplace and its value. In the case of value, it’s often about the intangible assets of goodwill – where a successful, long-standing practice adds value that a brand new practice just starting out has not yet achieved.

A dental practice is a commodity, like any other business, with the national average for the price of a dental practice around 65 percent of the previous year’s gross receipts. Of course, this percentage can vary from around 50 percent in rural areas to over 100 percent in large metro centers.

However, there is much more that goes into price than a practice’s tally of receipts. An evaluation of goodwill can be conducted to get a clearer picture of the true value of your practice. This goodwill consists of the practice name, reputation, and skills of the dentist and team that has been in place and the factors that have given the selling practice a loyal patient base and reputation to bring in new patients. Buyers will benefit from the likelihood that this goodwill will give continued cash from the retention of patients and the growth of the patient base due to this established reputation.

This typically is reflected as a percentage of annual revenues. Savvy buyers know that it’s not all about location or the number of patients within your practice that matters. Only a practice with a great value and a fair price will deliver measurable results. Thus, it’s important to be able to calculate your goodwill to determine a fair price.

What Drives Value in a Dental Practice?

Unlike price which is negotiated, the value is determined by a number of factors. It’s what a practice is worth to someone, given their wants, needs, purchasing power, use supply or demand. The value of intangibles that constitute goodwill include:

  • A favorable location
  • Going concern value
  • Use of seller’s name
  • Favorable leasehold
  • Covenant not to compete
  • Compensation for part managerial and entrepreneurial services
  • Patient lists
  • Credit records
  • Patient care contracts
  • Employee contracts

An evaluation that includes this information is typically provided in a report. Often totals are calculated over a ten-year period to provide a broader snapshot of a practice’s true value. An important factor in the valuation of goodwill is why and how a value is achieved. Thus, a comprehensive report would contain background information and documentation so that anyone reviewing it could clearly understand and confirm the data.

The Income Approach

While there is still substantial justification for creating a report that separately calculates goodwill value and asset value, the income approach can also be used to value dental practices. For this approach, there is no distinguishing between goodwill value and asset value. It only looks at the return available.

Differing Opinions on Value

Unlike dentistry, dental practice valuation isn’t an exact science. Even highly knowledgeable, skilled appraisers can have vastly different opinions on the value of a practice. However, in every valuation, there should be a clear understanding of the resources used and the appraiser’s credentials. Not all appraisals are created equal, so it’s important to choose an appraiser wisely.

Henry Schein Professional Practice Transitions, Inc. is a national leader in dental practice transitions. A subsidiary of Henry Schein, Inc. they provide expert guidance for selling and buying dental practices, dental practice fees and management, assessing partnership and associate-ship opportunities, and performing dental practice appraisals and valuations.