Thinking about purchasing an existing dental practice – or preparing to sell one? One of the most crucial steps is establishing how much the practice is worth. Beginning with an accurate valuation sets the stage for effective negotiations and prevents the misunderstandings that often kill deals.
Because a sale can encompass some or all aspects of the practice, you will need to decide what exactly you are selling (or buying) and when. Here are 6 scenarios that call for valuation to be set so that negotiations can go forward. Each involves different timing and intentions that influence how valuation will be calculated.
1. Sale of the entire practice.
In this case, the seller seeks professional help in arriving at a realistic sale price that includes the value of the practice’s client base (based on cash flow, collections and other factors), branding, website and other related assets, along with hard assets such as equipment, supplies, computer and phone systems and real estate (if the owner has title to the building and grounds). This valuation gives the purchaser accurate numbers to work with in deciding whether to buy and how to get financing. Remember that the practice is valued separately from the real estate and may be subject to different loan terms by the lender.
2. Sale of a portion of the practice.
A partial valuation is sometimes sought when the practice owner wants to slow down but not sell out quite yet. Often termed a phased buyout, this gives the owner and potential buyers an accurate value of the practice now while setting the stage for a full transition later. Changes that happen during the transition period will inform the final sale price.
3. Future sale to an associate.
Much like the partial sale just described, setting a valuation now as preparation for a future sale to an associate helps the final transaction proceed more smoothly. Both seller and buyer will be clearer on the practice’s initial value and any change in value during the time the owner and associate are still producing.
4. No sale pending, but valuation needed for long-term financial planning.
Dental practices are significant assets that may need to be valued for purposes of retirement planning or other financial transactions. Having a realistic estimate of the practice’s value helps the owner make sound plans for the future. It’s especially critical to do this if, as the owner, you assume that proceeds from the sale of your practice will fund the majority of your retirement needs.
5. Creation of a new partnership or solo practice group.
In this scenario, an accurate valuation sets the baseline value of an existing practice (or practices) before forming a new entity. If the new partnership or group will own the combined assets, the starting valuation will prove useful if and when the partnership is dissolved or one partner leaves.
6. Valuation needed for a divorce settlement.
Various factors determine how a practice’s value is distributed in a divorce, but a fair valuation is always needed. Owners should make sure that the appraiser chosen to value the practice knows what standard of value and valuation methods are appropriate for the circumstances and the state where the practice is located.
Determining the value of a dental practice: what’s involved?
No matter when or why you are planning to sell, you will need the expert advice of a valuator who works with professional practices, preferably in the dental industry. Your valuator will take many factors into account, including:
- Your practice’s location and visibility in the community
- Current sources of revenue
- Potential for future growth of patient base and revenues
- Current patient attraction and retention rates
- Projected patient and revenue retention after the sale
- Condition and age of medical and dental equipment, including imaging and office systems
- Office space, whether leased or owned: size, condition, and general appeal for staff and patients
- Value of office space and surrounding land, if included in the sale
- Long-term trends of the practice’s revenue and profit margin
The process will require you to have complete, accurate financial data on hand. If you haven’t created or updated a balance sheet for your practice recently, add this to the list of steps to complete before meeting with your valuator. Engaging a certified accountant can make this step easier – and give you a chance to discuss the tax implications of selling.
The valuation process may reveal issues that you will want to address before putting your practice on the market. Many dentists take years to prepare their practices for a profitable sale.
Valuation and more: resources to help you navigate the process
The ADA offers many helpful tools for dentists seeking to buy or sell a practice. Begin with Guidelines for Practice Success (GPS): What to Do When Selling a Practice, where you’ll find insights and checklists to help you plan for a smooth, profitable transaction.
These ADA videos focus on specific topics that may be helpful:
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