The value of a business is determined by how much money a buyer would pay to acquire the opportunity and earn an income. Whether an investor-owned or owner-operated business, the income left after all expenses are paid is the incentive to take on the ownership risk. For an owner operated dental practice, the money left after overhead is paid is the practice “net income”. By estimating this figure for the first year of operation, a purchaser is able to make an informed decision to pursue an opportunity or not.
We often get the question, “so, ballpark, what do you think my practice is worth?” While this may seem like an easy estimation to make, without proper evaluation, there is no reliable way to answer.
While it is true, nationally, that general practices sell, on average, for anywhere between fifty (50) to ninety plus (90+) percent of the most recent year’s collections, depending on these figures can be extremely deceptive.
For example, assume two equivalent practices, each collecting the same amount. By applying a “percentage of gross” methodology, both practices would have the same value. Looking deeper, though, if one practice’s rent was double the other’s, would both practices be worth the same? Assuming that every other aspect of the two practices was exactly the same, the obvious answer would be “no”. The practice with the lower rent would be worth more as it results in more owner net income.
When asked to evaluate a practice, an appraiser should adhere to standard, accepted procedures for business appraisals. There is specific methodology for the evaluation of a business and while equipment or aesthetics may not have a significant value on their own, the quality of both may be extremely important in the determination of the overall practice value.
In most cases, the seller of a practice feels that their opportunity is a “gold mine”. In many cases, the doctor sends out procedures that could be done in-house. An aggressive purchaser who wants to do more business only needs to keep these procedures in-house, advertise, join insurance plans, or change something else about the practice to make it more profitable. Now, while this may be interesting to a purchaser and a great opportunity for their future, if the seller has not taken those measures, the “gold mine” is obscured. The bottom line, though, is that it is impossible to value “potential”.
A purchaser, though, does purchase the opportunity to reach that potential. Value is an opinion either backed up by guesses or facts. Informal polls of colleagues or classmates, public or internet forums, or simple formulaic calculations are guesses. Standard methodology, taking into account multiple variables and cross-examined with several methods, is the only way to produce a reliable valuation.
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.