A very common question we get is what is my practice worth? The reasons for this question vary. The most pleasant reason is that the practitioner has reached a life-long goal of retirement and it is now time to sell to another practitioner. Other reasons, that are not so pleasant, are divorce or death. Regardless of the reason for the question, there’s one way to determine the value of your dental practice: have a full-blown business valuation.
What if you don’t want to undertake a valuation? Is there a rule of thumb you can use? Well, yes and no. There is an underlying thought in the legal, practice brokerage and accounting community that a general dentistry practice’s value is 65% of the practice’s annual revenue. Then you need to make adjustments to account for your practice’s specific situation. After accounting for adjustments, your practice’s value can range from 50% up to even 100% of revenues.
This is a very wide range, but that’s what makes the “rule of thumb” somewhat useless. The value of the practice can vary widely based on a number of factors, such as the “state of the art” of the medical equipment, the location of the practice, the staff that is in place, the age of the patient base, the competition in the area, the trends in the practice revenue, current economic factors and the state of your local dental practice sale market (e.g. the number of sellers versus the number of buyers available). All these factors can have a significant effect on the final value placed on the practice.
The first step that we take in attempting to answer the practitioner’s query is to run projections of the practice income and expenses to see what the likely profitability would be for the potential buyer. These projections can perhaps assume a certain amount of reduced income due to the change of ownership, as well as an increase in some operating expenses due to the need for marketing expenditures by the buyer, as well as equipment and supply purchases that might be needed in an existing practice. Once this is determined, an amount is established as a reasonable compensation for the buyer. From that point, we can determine what remains to be able to repay the seller. Once this is established, we’ve arrived at a reasonable value of the practice.
Some practitioners have an inflated value of their practice and some buyers have an unreasonably low value of a practice. The above exercise gives a rational view of what a potential buyer can afford to pay for the practice, which is the realistic value of the practice. With these projections as a starting point, a deal can be negotiated wherein both the buyer and the sell come out with a “win / win” arrangement.
Contact our Dental Practice Value Professionals
Do you need to know the value of your dental practice? Want help increasing your practice’s worth? Contact Rea & Associates. Rea’s dental valuation professionals will evaluate the current value of your practice and help you build a plan to increase that value. Whether you’re looking to sell or to grow, we’ll help you manage the value of your most important asset: your practice. For more information, contact our Ohio dental valuation professionals.
Tags: Business Valuation, buy-sell agreement, dental practice, dental practice value, dental valuation, practice valuation