What Are the Commonly Used Methods for Dental Practice Valuations?

Whether you’re planning to retire or move to a different state, selling your dental practice is one of the most important decisions you’ll ever make.

However, if you don’t have any idea about the current value of your practice, your chances of leaving money on the table or getting shortchanged in the process are extremely high. So, how do you value a dental practice for sale? 

Before anything else, you’ll have to understand that the market value of your dental practice isn’t based on your net income or an average of 80% of your collections for the past three years. Its value is based on three factors – cash flow, risk of investment, and return on investment for the prospective buyer.

Let’s take a closer look at the commonly used methods for dental practice valuations.

Top 3 Methods for Dental Practice Valuations

Income-based Valuation

In most cases, knowledgeable buyers use income-based valuation methods to determine the worth of a dental practice. These methods include discounted cash flows and capitalized earnings. Moreover, the term “income” in income-based valuation methods refers to the pre-tax cash flow of a dental practice.  

• Discounted Cash Flows Method 

This method determines the value of a dental practice by projecting ten years of net income before calculating that income’s net present value. The basis for the projected cash flows is the reasonable growth rate of your practice’s collection and associate practice costs per year. These are then discounted by the assumed cost of capital and a risk premium which ranges from 23% to about 31%.

For example, your practice has collected $1 million in 2020 with a 22% profit margin or $225,000 in net income. You assume an annual net income growth rate of 2% over ten years to get a valuation of $817,000. 

• Capitalized Earnings Method

Your dental practice’s prior year’s net income will be used as the basis of this valuation method. Divide this number by a specific cap rate to determine the fair market value of your dental practice. Keep in mind that the industry standard for cap rates ranges between 25% and 31%.

This means that if your practice has collected a total amount of $1 million in 2020 with a 22% profit margin which is $225,000 in net income, you divide this amount by a 28% cap rate to get the valuation of $803,000. 

Market-based Valuation 

This method uses market data of other dental practice sales in your area to determine the value of your practice. It multiplies the historical practice collection with a collections multiplier which can be between 60% and 80%. However, since this method fails to take profits into account, you find it difficult to find real comparable sales figures.  

For instance, a dental practice in your area was sold for the amount of $750,000 with about $1.2 million in yearly collections and 60% PPO/40% Medicaid. This entirely differs from another practice with about $1.2 million in yearly collections and 90% Fee for Service/10% PPO. The value would be higher because the risk factor is considerably lower in the second case. 

Net Asset Valuation

This method relies on the dental practice appraisal of both its tangible and intangible assets. Since 80% to 85% of a typical practice’s value comes from intangible assets, this method often fails to give you the accurate fair market value of your practice.

How Do You Value a Dental Practice for Sale? 

If you want to get the most for your dental practice when you sell it, contact the experts at Viper Equity Partners for a free consultation today.