January 3, 2024
Navigating Dental Practice Valuation: Common Questions for Valuation Specialists
As a dental practice owner, the valuation of your practice holds significant weight. Whether you’re considering selling your practice, bringing in partners, or simply gauging its financial health, understanding the intricacies of valuation is crucial. It’s also especially important to keep in mind that – like no two patients are the same – no two practice valuations are the same.
Engaging a valuation specialist can shed light on the true worth of your distinct practice, but before diving in, familiarizing yourself with common questions to ask these specialists is key. As Professional Transition Strategies (PTS) Business Valuation Specialists Jess Williams and Mark Frazzini say, you deserve to know what’s going on under the surface and a range of factors contribute to your dental practice’s value. Here are some of the top questions they encounter from dental entrepreneurs as they go through the valuation process for an upcoming transition.
What valuation methodology will be employed?
A range of valuation methods exist that require digging into different metrics to better understand a practice’s value, and they often depend on the type of transaction a doctor wants. Earnings is one metric like this because it depends on if a doctor-owner wants to sell to an individual or a DSO.
For example, if a doctor intends to sell the practice to another dentist, seller’s discretionary earnings (SDE) will be used to determine the practice’s earnings. SDE represents a true take-home value and leftover money after you pay all expenses associated with running the practice.
EBITDA (or earnings before interest, taxes, depreciation and amortization) is what should be used if the doc is interested in selling to a DSO. It reflects a value based on investment and is a common metric for private equity backed deals (i.e., most groups) – and even PE deals outside of dentistry.
Understanding the methodology your specialist will employ and why it suits your practice’s circumstances is essential for clarity.
Can you walk me through the key factors impacting the valuation?
Insight into the factors influencing the valuation — patient base, revenue trends, location, equipment, staff, etc. — is crucial. Oftentimes, we see supplies, payroll, advertising, and rent drain a doc’s bottom line. Seeing all these metrics laid out in a practice prospectus provides a comprehensive view of your practice’s worth and also give your the insight you need to even make adjustments within your practice to increase its value.
How will intangible assets, like goodwill, be assessed?
In addition to tangible assets like operatories, patient base, and more, there are intangibles that can influence a practice’s value with various groups and individuals. For dental practices, goodwill – a measure of the practice’s reputation and patient loyalty – is a significant intangible asset. Understanding how valuation specialists assess and quantify goodwill is crucial as it contributes substantially to the overall value.
Can you highlight potential growth opportunities or risks affecting valuation?
Valuation specialists can offer insights beyond the current state of your practice. Within each unique prospectus we create, doctors are given an accurate understanding of the operating costs of their practice – and areas to improve so they can receive better offers in the long-run. Valuation specialists are equipped to identify growth opportunities and potential risks that might impact its value in the future. Understanding these aspects can help in strategic decision-making.
How can I improve my practice’s value?
Since each practice is different, there’s no one-size-fits-all approach to improving a practice’s value. That’s why you should seek guidance on steps you can take to enhance your practice’s value. For example, we’ll conduct comparisons of key factors against proven industry averages to flag any areas in which a practice may be over or underpaying, which can impact the practice’s value, along with analyzing other essential practice operation components when conducting a prospectus.
A seasoned valuation specialist will be equipped to provide recommendations specific to your business during the valuation process, whether it’s optimizing operations, improving patient retention, or investing in distinct areas, these insights can help you work towards maximizing your practice’s worth.
What advices would you give doctors looking to transition their practice?
Think of the valuation as a mile marker. The best thing you can do is start the process early so you can work off actual data rather than hypothetical scenarios. The valuation process allows you to understand where your business currently stands, its fair market value, what options you have, and if there are areas you should work on to increase the value. Then, it’s in your best interest to hire a reliable dental practice broker who will connect all the dots.
Valuation specialists play a pivotal role in determining the worth of your dental practice. By asking pertinent questions and delving into the specifics of the valuation process, you gain a clearer understanding of your practice’s financial standing. This insight not only aids in potential transactions but also empowers you to make informed decisions for the future of your practice.
There’s no cost and no obligation to begin the valuation process with us. Start from a place of facts. Contact the experts at PTS to learn the true value of your dental practice.