Deep Dive into Dental Practice Valuation (+ Examples)
Valuing a dental practice is a complex exercise. It goes beyond the simple math of adding up equipment costs or assessing yearly revenues. In fact, a dental practice valuation is calculated from a blend of its tangible assets (like machinery and real estate) and intangible assets (such as its reputation and patient base).
But that’s not where it ends. External factors like the practice’s location, the local economy, and even the prevailing competitive landscape can significantly tilt the valuation scale too.
If you’re a dentist contemplating a sale, an investor eyeing a potential purchase, or a professional keen on understanding the intricacies of dental practice valuation, this guide is tailored for you.
How to value a dental practice: 3 methods
1. Asset-Based Approach
This method calculates a dental practice valuation based on the sum of its tangible and intangible assets minus liabilities. In simpler terms, it’s what you would have left if you were to sell off all assets and pay off all debts.
Example: Imagine a dental practice has the following:
- Tangible Assets:
- Dental Equipment: $500,000
- Real Estate (Owned Property): $1,000,000
- Office Furniture: $50,000
- Intangible Assets:
- Goodwill (Reputation, Brand Value): $200,000
- Patient Lists: $50,000
- Liabilities:
- Outstanding Loan: $300,000
The total value using the asset-based approach would be: = ($500,000 + $1,000,000 + $50,000 + $200,000 + $50,000) – $300,000 = $1,500,000
2. Income-Based Approach
This method determines a dental practice valuation based on its ability to generate future profits. A common technique within this approach is the discounted cash flow (DCF) analysis, which projects future cash flows and discounts them back to present value terms.
Example: Suppose a dental practice is expected to generate the following net cash flows for the next five years:
- Year 1: $250,000
- Year 2: $270,000
- Year 3: $290,000
- Year 4: $310,000
- Year 5: $330,000
Assuming a discount rate of 10% (used to bring future values to present terms): The present value of these cash flows would be calculated for each year and summed up. For instance, the Year 1 cash flow’s present value = $250,000 / (1+0.10)^1 = $227,273. The process is repeated for all years, and the values are summed to get the total practice value based on projected income.
3. Market-Based Approach
This method values a practice based on what similar practices have recently sold for in the market. It often uses valuation multiples, like Price to Earnings (P/E) or Price to Revenue.
Example: Suppose there are three dental practices in the same region that have recently sold. These practices had the following annual revenues and selling prices:
- Practice A: Revenue of $500,000, Sold for $750,000
- Practice B: Revenue of $600,000, Sold for $840,000
- Practice C: Revenue of $550,000, Sold for $800,000
From these sales, the average Price to Revenue multiple is calculated by dividing the selling price by its revenue for each practice and then averaging the results. If our subject dental practice has an annual revenue of $580,000, and the average Price to Revenue multiple from the market is determined to be, say, 1.4, then the estimated value would be $580,000 x 1.4 = $812,000.
It’s essential to understand that while these examples simplify the methods, valuing a practice in real life may require more intricate considerations and professional judgment. It’s always a good idea to consult with experts when making such assessments.
Dental Practice Financial Model Template | Excel Spreadsheet
Download an expert-built 5-year Excel financial model for your business plan
Dental Practice Financial Model Template | Excel Spreadsheet
Download an expert-built 5-year Excel financial model for your business plan
How assets impact a dental practice valuation?
While tangible assets provide a clear and often easily quantifiable value to a dental practice (as in the asset-based methodology), intangible assets can significantly influence the overall worth of the business. When valuing a dental practice, it’s essential to give due consideration to both types of assets to arrive at an accurate and holistic assessment.
Physical (Tangible) Assets
These are the assets that have a physical presence and can be touched or seen. Their value is often easier to ascertain because they have clear market values or can be depreciated over time.
Examples for Dental Practices:
- Real Estate: If the practice owns the property where it operates, its value plays into the total valuation. The location, size, condition, and age of the property all contribute to its worth.
- Dental Equipment: This can range from dental chairs to X-ray machines and surgical instruments. The age, condition, brand, and technological relevance of the equipment can significantly affect its value.
- Furniture & Fixtures: Waiting room furniture, cabinets, and other fixtures, though minor compared to other assets, still have a monetary value.
Impact on Valuation:
- Tangible assets typically form the backbone of the asset-based approach to valuation. They provide a base value for a practice – even if the business was to cease operations, these assets could be sold off.
- In some situations, especially where a practice is declining, the value of tangible assets might be higher than the practice’s operational value.
Intangible Assets
These assets lack a physical presence, but they can have substantial value, often deriving from the practice’s operations, reputation, and strategic advantages.
Examples for Dental Practices:
- Goodwill: This is the value derived from the practice’s reputation, brand recognition, and overall patient perception. A well-regarded practice in its community will have high goodwill value.
- Patient Base: The active and loyal patient base is a significant intangible asset. A practice with a recurring set of patients, especially those who opt for high-value treatments, adds substantial value.
- Staff Quality and Morale: A well-trained, loyal, and efficient team can be considered an intangible asset. Their skills, experience, and relationships with patients can drive referrals and ensure smooth operations.
- Operational Procedures: Efficient and effective operational processes, patient management systems, and protocols can significantly enhance a practice’s value.
- Non-compete Agreements: If a selling dentist agrees not to open another practice within a specific radius for a certain period, it provides value to the buyer.
Impact on Valuation:
- Intangible assets can play a more significant role in the income-based and market-based valuation methods. High intangible value often translates to higher earnings or a more favorable position in the market compared to peers.
- A practice with strong intangibles can command a premium over just the tangible assets’ value. For instance, two practices with similar equipment and property values might have different total valuations if one has a more robust patient base or better reputation.
- Intangible assets can sometimes be harder to quantify. Still, their impact can be inferred from business performance metrics, like steady revenue growth, high patient retention rates, or above-average profit margins.
Dental Practice Financial Model Template | Excel Spreadsheet
Download an expert-built 5-year Excel financial model for your business plan
Dental Practice Financial Model Template | Excel Spreadsheet
Download an expert-built 5-year Excel financial model for your business plan
What about external factors?
When valuing a dental practice, while the internal assets and operations provide the core foundation, these external factors can tilt the scales significantly. They offer context, highlighting the practice’s position within a broader ecosystem. Therefore, considering these external elements is not just optional; it’s integral to obtaining a holistic and accurate valuation.
1. Location
What is it? The geographical placement of the dental practice can dictate the potential patient pool, the local competition, and the costs associated with running the business.
Impact on Valuation:
- Urban vs. Rural: Urban areas might offer a larger patient base but can also come with higher competition, rent, and operational costs. Rural areas may have less competition but a smaller patient pool.
- Growth Potential: A practice located in a rapidly growing community has potential for increased patient inflow and revenue.
- Accessibility: Locations near major roads, public transport hubs, or in commercial centers can increase visibility and patient accessibility, enhancing value.
2. Economic Trends
What is it? The overall health of the economy can affect consumers’ ability and willingness to spend on dental care, especially non-essential or cosmetic procedures.
Impact on Valuation:
- Recessionary Pressures: Economic downturns can lead to reduced discretionary spending. Dental practices that primarily offer elective or cosmetic services might see a more significant dip in revenues during these times.
- Insurance Coverage: Economic challenges might also impact employment rates, and consequently, how many individuals have employer-provided dental insurance.
3. Demographic Trends
What is it? The age, income, and cultural composition of the local population can shape the services in demand.
Impact on Valuation:
- Aging Population: Older communities might require more restorative or prosthetic dental services.
- Young Families: Areas with younger families could see increased demand for orthodontics or pediatric dentistry.
- Income Levels: High-income areas might have a greater demand for cosmetic dentistry or premium services.
4. Regulatory Environment
What is it? State or national regulations can impact dental practice operations, ranging from licensing requirements to patient data handling.
Impact on Valuation:
- Licensing: Regions with strict or cumbersome licensing procedures might limit the entry of new practitioners, reducing competition.
- Healthcare Reforms: Changes in healthcare laws or insurance provisions can influence the profitability and operational modalities of practices.
5. Technological Advances
What is it? The dental industry, like all medical fields, is influenced by technological advancements that can change the standard of care, patient expectations, and operational efficiencies.
Impact on Valuation:
- Adoption of New Technologies: Practices that swiftly adopt and integrate new technologies might have a competitive edge, offering advanced treatments or better patient experiences.
- Telehealth: The rise of remote consultations, especially post-pandemic, can affect patient-practice interactions and the potential for remote patient management.
6. Competitive Landscape
What is it? The number and quality of other dental practices in the vicinity can shape a practice’s market share and pricing power.
Impact on Valuation:
- Saturation: In areas with a high density of dental practices, competition can be fierce, potentially reducing individual practice revenues.
- Niche Services: Offering specialized services that few local competitors provide can be a strong differentiator, adding value to the practice.
Dental Practice Financial Model Template | Excel Spreadsheet
Download an expert-built 5-year Excel financial model for your business plan
Dental Practice Financial Model Template | Excel Spreadsheet
Download an expert-built 5-year Excel financial model for your business plan
