June 27, 2018
6 Factors when Valuating a Dental Practice
The process of valuating a dental practice before selling is not only necessary for the banks and buyer, but also valuable for assembling a prospectus. A proper valuation will include an appraisal, which will help the seller determine which transition option is best. Here is what you can expect to provide during that process.
Should you upgrade before selling your dental practice? Yes, if selling within five years; no, if selling within a shorter amount of time. Upgrades can be as small as getting rid of clutter and giving the space a facelift as you’re not going to get out what you put in when prepping to sell.
While purchasing new equipment before selling your dental practice will add to the value of a prospectus, you won’t get a return on your investment dollar for dollar. When it comes to hard assets, consider what you could get it insured for and the resell value, among other financial factors. When valuating, Professional Transition Strategies (PTS) will conduct a physical observation of the office with photos of the equipment.
There’s more to a prospectus than hard assets, which are easy to quantify. However, the majority of a practice’s value comes from its ability to generate a long-term income stream for the buyer, which includes the doctor’s status within the community, practice name, location, staff loyalty and longevity, and brand awareness and marketing, all of which mean you pay fewer taxes at closing.
The financials that are involved in a sale include top and bottom line numbers, most recent tax returns, a three-year weighted average of collections and production broken down by provider and procedure type, past three years of profit-and-loss statements, investments, list of insurance plans, current balance sheet, accounts receivable aging report, and a copy of the current lease.
Other factors that will be included in the analysis will be whether the practice is digital (and the cost to make it digital, if it’s not); the desirability of its location; if the practice refers out all its work; the total active patients and new patients per month for the past 12 months; employee roster with hire dates, hourly wages and benefits; a bio of the selling doctor; and office hours.
Your practice will value differently if you’re selling to a dental service organization (DSO). A DSO won’t take hard assets into account but rather will focus on collections and other finances. DSOs also have private equity money, which is favorable to a bank over an individual buyer when it comes to securing a loan.
Read up on the process of valuating your dental practice in our e-book “Strategies for Transition,” then contact the experts at Professional Transition Strategies to begin calculating how much your practice is worth.