If you are planning to sell your dental practice for retirement, a move, or another personal reason, take the first step and determine its worth. Buyers place a high value on a strong patient base and strong predictors of future earnings, but there are many other valuation elements to consider. 

Valuation models are complex; it is to your advantage to hire a dental broker with experience in your market. 

Market-based Valuation

This valuation model is based on data gleaned from other dental practices in your market. It typically looks at collections times a multiplier. It is not recommended as a sole evaluation tool because, like comparables in home sales, you aren’t always comparing apples to apples. In addition, this valuation is based more on collections than profits. 

Net Asset Valuation

The net asset method relies on appraisals of all assets, including tangibles like real estate, furnishings, and equipment. Valuation of equipment involves depreciation over the course of its useful life. For example, over 10 years, equipment might be depreciated one-tenth of its initial cost each year. 

Net asset valuation of a dental practice relies more heavily on intangibles such as goodwill and reputation. In fact, goodwill comprises up to 85 percent of practice value. 

Income-based Valuation 

This method calculates a practice’s worth based on discounted cash flows or capitalized pre-tax earnings. According to a report in DentistryIQ.com, these methods are the most accurate in establishing fair market value. 

• The capitalized earnings method is based on the prior year’s net income or an average of the last few years. This number is divided by a cap rate. The average is 25 to 31 percent. 
• The discounted cash flow method projects 10 years of net income based on the growth rate of collections and practice costs, and then calculates the net present value of that income. This is then balanced by the cost of capital plus a risk premium.

These are just a few methods of practice valuation. Each dental office is unique and deserves a customized analysis. The most important step you can take to value your dental practice properly is to obtain an appraisal. A dental broker will look at a wide range of assets including net income, market issues, staff skills, patient demographics, location, fee schedule, and much more.  

For an accurate, experienced appraisal of your practice, schedule a consultation with our dental brokerage experts.