Are dental practice values increasing or decreasing?

May 26, 2015

Article

In comparing dental practice values across the country, there are a number of factors that are constant when determining that figure used to estimate the value for the practice in question. One of the most important determinants is the location of the practice and the demographics in its geographic area. The income level, the educational achievements of the population, housing costs, and the growth of the population all play a part in determining the amount that a practice is worth. A general rule of thumb relating to the percentage of the last year’s gross revenue that will be used to estimate a dental practice worth, or listing price in the event of a sale, employs these indicators as a guideline for an educated guess. From Manhattan to Los Angeles and all places in between, these points are a critical piece of the puzzle in calculating the price that a dental practice will bring on the open market.

Dental practice overhead and net profitability

Any good dental practice evaluator also will look at the dental practice revenue and expenses to determine the net profit percentage as well as the overhead percentage of the dental practice to assist in its evaluation. The higher the net profit and the lower the overhead percentage of the practice, remain constants in the evaluation process as well. Normalizing the net profit and overhead costs must be a consideration when valuing the dental practice to see what items are included in overhead that may be restricted to the dental practice in question. Those items may not be necessary for the dental practice to continue at a high level of profitability. It is possible that a spouse may be being paid an additional amount based on his or her ability to perform a task that another could do more cheaply. Children may also be on the payroll (which is another cost that would not be necessary for an arm’s length transaction by a buyer). Are there any personal “business expenses” that are being charged to the dental practice that are not essential expense items to the dental practice that would not be needed in a potential transition? These are some of the normalization “add backs” to the dental practice profit that would increase that amount and allow for a higher profit margin to be available to amortize the debt that is associated with the cost of the acquisition price of the dental practice. These “add backs” also increase the value of the dental practice for the owner’s edification in the event of estate planning, life or disability insurance needs, and other areas of concern to the dentist and his or her spouse.

Equipment and the physical plant

The above are important areas of concern when evaluating the worth of a dental practice. Other valuable considerations that assist in determining the value of the dental practice include the equipment and how long that equipment will perform at an acceptable level of operation. Is it “state of the art” in technological terms of advancement or will it have to be replaced quickly, not because of age, but primarily because of speed and accuracy? Is the office in a comfortable setting with nicely appointed wall coverings and furniture? Does the interior have to be remodeled? Does the computer equipment have to be brought up to date? Are there any additional costs necessary to be made within a short term? Is the office in a good location and easy to access? The answers to these questions will either add to the value or subtract from it if substantial sums are necessary to improve efficiency and appearance that a potential transition applicant will need to know.

What about the patient base?

The number of active patients in the practice under consideration is important to the total valuation of the dental practice. With a patient base up to about 750 for the practice and few new patients arriving each month, the value will suffer and will be on the low side. A solid active patient base of about 1,500 patients and marketing efforts that cause a flow of 25 to 30 new patients per month will cause the value of that practice to be on the higher side. An active patient base that does not decrease is a good indicator of a healthy and profitable dental practice. It is the type of practice that will bring a good valuation and pricing in a transition situation. Losing a material number of patients on a regular basis dramatically reduces the value.