Whether you’re selling your business, taking on a partner, or organizing your estate, performing a dental practice valuation is essential for success. Dental practice valuations give you an accurate idea of the state of your business, which can help you make better decisions about your future.

Dentist with dental equipments

With that said, there are different types of dental practice appraisals and a wide variety of specialists that perform these. You need to work with a reliable provider to ensure an accurate dental practice valuation and compare this value to other dental practices of similar size. This will give you a clear-cut idea of where you stand in the current market. 

In this article, we’ll go over the definition of a dental business evaluation and cover the reasons why it’s important to perform one on a yearly basis. We’ll also share common models to appraise this type of business and go over the steps on how to value a dental practice.

What is a Dental Practice Valuation? 

A dental practice appraisal or valuation is a value estimation that’s created by a professional service provider after performing an in-depth analysis of the business. 

The practice of valuing dental practices has a similar goal to appraising other businesses: determining the accurate market value of a company. This process looks different depending on the model being used, but all common models take a wide range of variables into consideration. This includes both tangible assets and intangible assets, for example:

  • Accepted payment methods
  • Total number of existing patients
  • Average number of new patients
  • Net income
  • Gross revenue
  • Any property or leasehold improvements
  • Cash flow
  • Payment channels accepted, insurance deals, and earning methods in place
  • Average annual revenue
  • Patient demographics
  • Type and size of the business property
  • Projected cash flows
  • Net present income value
  • The practice’s goodwill (more on this later!)
  • Capitalization rate
  • Mandatory and discretionary expenses
  • Market factors, like how many practices in the area

The list above is by no means comprehensive — only the specialists that help determine the value of dental businesses understand all of the factors that need to be assessed. Practitioners who are selling, buying, or simply verifying the true value of their dental offices have to work with an experienced expert that implements reliable valuation methods.  

Do You Need a Dental Practice Valuation?

If you’re ready to make an investment and start your own business, you’re likely asking yourself “how much is a dental practice worth?”, in which case your seller performs a valuation. For this reason, it also makes sense to look for a valuation as this will help you determine the real market value of your dental practice. 

But, appraising your business is actually useful beyond anything involving dental practice sales. As a matter of fact, many practitioners perform valuations on a yearly basis in order to guarantee better financial planning. 

Young female dentist standing in room and looking at camera

This is possible because, besides revealing the fair market value of your dental office, a valuation compels you to organize a huge amount of administrative information. Once you collect all of the information required for your business valuation, you’ll also have this data available to 

Things to Consider When Appraising a Dental Practice

A professional dental practice evaluation includes all tangible and intangible assets, for example, the net present value and the projected future earnings.

That said, if a practitioner wants to get an accurate appraisal, this individual will have to collect a huge amount of information first. Whether you’re lining up paperwork for a potential buyer or looking to expand into another market, you’ll need to work with your accountants as well as your legal team to determine the fair market value of your business. 

The list of details that you need to collect for your dental practice appraisal include, but it’s not limited to:

  • 3 to 5 years of profit and loss reports
  • 3 to 5 years of tax returns
  • Balance sheet updated to the current date
  • Services breakdown by procedure
  • Number of active patients
  • Average of new patients per month for the past 12 months
  • Copy of lease or ownership deed
  • Accounts Receivable report
  • Team member roster
  • Inventory of all equipment
  • Office hours
  • Accepted insurance plans and dental plans or programs
  • Biography of selling dentist and summary of business

Now, it’s important to note that all practitioners and markets are different. You may need to adjust some of these requirements based on your market, the dental broker you work with, and many factors. 

Also note that the type of valuation being performed will affect both the requirements and outcome of your appraisal. For instance, an income-based technique focuses on internal factors while a market approach heavily values external variables. 

How to Value a Dental Practice

The first and most important element you need to do to get a valuation of your practice is to partner with a reliable dental practice appraisal service provider. 

You may find consultants, transition service providers, brokers, and similar professionals that offer valuations. Nevertheless, you should only work with valuation experts that provide private services and have a good reputation as well as experience in the commercial appraisal industry.

Once you’re sure that you’re working with a reliable valuation expert, you can consult with this professional and determine what you need to get your business valued properly.

Commonly Used Dental Practice Valuation Methods

As we mentioned previously, there are different dental practice valuation models that your expert can leverage. Besides changing the requirements, keep in mind that the different methods may also impact the overall value of your home. This occurs because each formula gives priority to distinct variables. So, make sure to consult with your expert to find out what model is being implemented. 

Income-Based Valuations

Income-based valuations are among the most common appraisal models out there. The reason for this is that this model focuses heavily on the revenue, expenses, and the total number of financial interactions that a practice processes. 

Keep in mind that this model doesn’t include expenses such as interest, taxes, and depreciation. It simply gives prospective buyers an idea of the revenue being generated and its potential. 

Discounted Cash Flow Valuations

The discounted cash flow method calculated the value of your business based on its future cash flows. This is usually an option for long-standing practices that can forecast their performance for the next decade or more. Now, it’s important to understand that this requires individual growth and expense calculations for individual years. This is then multiplied by your discounted cash flow rate in order to determine your practice’s current value. 

Capitalized Earnings Valuations

Capitalized earnings valuations are technically a type of income-based appraisal. This method focuses on both current assets and future earnings in order to predict your long-term performance. Now, you also need to calculate the earnings capitalization rate, which enables you to make accurate long-term projections of your performance. 

Net Asset Valuations

Net assets valuations are appraisals that take into consideration all of your current assets, including both tangible and intangible. This can include:

  • Intellectual property
  • Brand and business
  • Patient lists
  • Real estate
  • Tools and pieces of equipment
  • Computers

Despite the fact that this valuation technique does include intangible assets, note that it doesn’t use anything besides the current property of your practice. Therefore, it may not be a good indicator by itself given that it doesn’t consider potential. 

Market-Based Valuations

Market-based valuations are any type of appraisal that focuses on the value of similar practices in your area. Simply put, it focuses on determining the value of similar practices and making adjustments to this number based on the differences between the two. 

Using a Rule of Thumb for Dental Practice Evaluations

A dental practice value “rule of thumb” is an assumption that can help you understand the value of your practice. 

For example, one common rule of thumb is that your practice is worth about 75% of your gross revenue. Another states that up to 85% of a practice’s value comes from goodwill, which is a set of intangibles that consist of reputation, community work, and team members.

Dentist working on teeth model

No rule of thumb is 100% accurate, which is one of the many reasons why you should work with a professional valuation specialist to get the best results.   

Want to Attract More Patients and Increase the Value of Your Practice?

Getting a dental practice appraised can help you make better decisions for the future of your business. Just make sure to partner with a reliable provider and take steps that enhance the value of your business, like opening up recurring revenue streams. 

To learn more about joining dental membership programs and better serve your immediate community, contact Membersy and we’ll be glad to help.