Valuing Dental Practices
Valuing Dental Practices
In this blog, we focus on valuation considerations of dental practices, including why a valuation may be needed, key drivers that may impact the valuation, and rules of thumb.
(Originally Posted August 13, 2018)
You’ve worked hard and you should be proud of yourself – you’ve graduated from your College of Dentistry and are ready to embark on your career. Or say, you’ve worked hard and are ready to retire. Either way – congratulations! Whatever the stage in your career, you will, at some point, be considering purchasing or selling a dental practice, or may need a practice valued for other reasons.
Why Would A Valuation Be Needed?
A dental valuation could be required for a number of reasons, including (but not limited to):
- Buying and selling a Dental Practice for purposes of negotiating a price;
- Transferring assets held personally into your Dental Corporation;
- Tax planning purposes, including estate freezes, adding shareholders, creating trusts, etc.;
- Family law purposes; or
- The bank may require a valuation for purposes of financing or re-financing.
What Is Goodwill and Why Does It Matter?
Goodwill is the premium in dental practices. Goodwill in a dental practice can include the patient charts, reputation within the community in which it practices, location, services provided or can be provided, and/or capacity of the practice, to name a few.
Goodwill matters because it makes up the majority of dental practice’s value and should exist in every successful dental practice. Maintenance of goodwill is imperative to ensure the value of a practice is not significantly tarnished.
Dental equipment may seem expensive but can last a number of years, even decades. There is value to having equipment that can be sold to another dentist who can use it for many more years to come. We consider appraisals for dental equipment to be imperative to a dental valuation, because determining the fair market value of the equipment may add value to the practice.
Other Areas That Can Impact Value
No two practices are alike. What you buy or sell a dental practice for may not be what your competitor buys or sells a dental practice for. We discuss some factors that may impact the value of dental practice
When the market is saturated with dental practices, competition is fierce and financing is not readily available, this could result in a lower value than when there is limited competition in the area and market conditions are favorable.
The practice’s capacity also needs to be considered. For example, if a practice has one operatory, the practice may not have a large (or even an average) market share, because of operational limitations. This could impact value. Say the opposite exists, a practice has six operatories, three of which are currently in use, but cannot fill to capacity. This could also impact value.
Location, location, location. A practice in rural southwestern Ontario may not have as many patients as a practice in a populated metropolis.
There are many specialties in dentistry. Offering specialty services may allow the practice to have higher revenues compared to the practice that outsources it specialty services.
Rules of Thumb
Rules of Thumb aren’t exactly rules, they are more like guidelines. Since the market dictates price, rules of thumb can be misleading. As we discussed above, there are many factors that can impact value, therefore applying the same rule of thumb to a dental practice in a rural, unsaturated market, would not be equivalent to applying the same rule of thumb to a metropolitan, saturated market.
We view rules of thumb as “sanity” checks when compared to our conclusions derived from earnings/cash flow based approaches.
If you want to buy or sell a dental practice, or you require a valuation of your practice for other reasons, give us a call! We are experienced in providing dental valuation reports and in facilitating the buy/sell process.