Do you know the value of your dental practice? How would you go about setting a buyout price? Practice valuation is not an exact science. There are a variety of approaches and multiple factors to consider. If you are thinking about selling your practice in 2-5 years, it’s important to start preparing now.
Here are three methodologies to consider when determining the value of your practice.
Income-Based Valuation
Your dental practice’s cash flow makes up a large portion of your total valuation. With an income-based approach, the value of your business is based on its past, current, or expected future cash flows. In this method, “income” refers to your EBITDA, or earnings before interest, taxes, and depreciation amortization. A dental practice’s sale price is typically two to four times its EBITDA figure. The income-based approach is often preferred because it uses historical data to project future earnings. For this method to be effective, you need at least 2-3 years of accurate data on which to base your assessment.
Market-Based Valuation
Another approach is the market-based method, which factors in the selling price of other practices in your area that are similar to yours. This method requires you to examine the market value of dental offices near you, essentially comparing them to your practice, then adjusting for any differences such as:
- Office size and location
- Type of practice
- Patient base
- Age of equipment
This approach requires you to have enough information to make a useful comparison. If you don’t have access to sufficient data or live in an area without other dental practices that offer a meaningful comparison, this method may not be a viable option.
Net Asset Valuation
Adding up your net business assets is another way to set the value of your practice. Net assets can be both tangible and intangible, with tangible assets such as equipment, computers, and property, easier to appraise. Intangible assets, things like brand recognition, staff experience, or patient loyalty, are more difficult to ascertain, but are still worth trying to include, especially since they tend to be left out of other approaches.
All of these methods require you to maintain clean records with accurate data, so be sure your bookkeeping is up to date. If you’re not already doing so, when you start thinking about selling, it’s a good idea to work with accounting professionals who have expertise in the dental industry.
Selling to an Associate
If it is your intention to bring on an associate with the understanding that they will buy your practice, remember that the goal should still be to increase profitability. If the net result is that overhead costs are greater than production increases, the result will be to lower the value of your practice. If the transition requires you to lower your own income, you should probably delay bringing someone on until it’s close to the time you want to sell. Any agreement with an associate should allow for a 6-12 month grace period during which you have the option to terminate the agreement if things don’t work out.
Your practice is a valuable asset so it’s important to use a good method to establish its worth. Given the complexities involved, it’s also a good idea to get professional help. If you have questions about how to appraise your practice or what steps you can take to increase its value, contact Hare CPA. We have expertise in dental business finance and can help make sure you get the full value out of your business.
