Valuing the Dental Practice
With the aging of the baby boom generation, we are starting to see the number of dental practices for sale increase. Further, the rates at which banks are willing to finance the purchase of these practices are at historic lows. This is good news for the new practitioners coming out of dental college as they can purchase an established practice with good financing terms.
The question then turns to how much a dental practice is worth. Most dentists have heard of certain rules of thumb, such as a percentage of gross billings. However, not all dental practices are equal and the value derived from such a simple metric can either over or under value the practice.
When valuing a dental practice, our main focus is on the cash flow generated and the take home profit for the practitioner. If one practice is generating margins at 20% of gross billings, while another is generating margins at 30%, the latter may be more valuable even with lower billings.
There are a number of other factors that may affect the value of a practice. One of these is the procedures that a dentist is currently referring out. Procedures such as implants and cosmetic dentistry may not be performed by the selling dentist as they are winding down and not looking to exploit these areas. The purchaser may be planning on performing these functions, thus increasing the potential revenue stream of the practice. On the other hand, these procedures may currently be in place and the purchaser does not wish to perform them. In this case, the revenue stream will decrease, thus devaluing the practice to the specific purchaser.
The demographics of the practice need to be examined as well. If the patient base is aging and the practice has not been taking on new patients, the total future billings will be lower than a practice that has a younger patient base. Further, the region in which the practice operates will impact potential billings. For example, if the region has significantly slumped economically with job losses, a portion of the population may not have been able to retain the insurance coverage they had in the past, thus making them less likely to have elective procedures or even the minimum cleanings. This will devalue the practice.
The building in which the practice operates also has an impact on the value and the purchaser needs to consider whether to purchase the property along with the practice. If the building is older and does not have the ability to add additional operatories, this will impact the ability of the practice to grow. However, the current patient base may be use to visiting at the current location and the ability to transfer them to a new location needs to be considered as well.
There are a number of other considerations to be taken into account when considering the value of a dental practice. The aforementioned are only a few of the larger issues.
If you would like more information or consultation on issues that will impact the value of a practice please contact your local DJB Financial Services Advisory Team member.
Written by: Corey Miles, C.A., C.B.V.