Guide to Dental Practice Valuation

October 17, 2023

Adam Hoeksema

Understanding the value of a dental practice is crucial whether you're a dentist looking to sell or a potential buyer, in this guide, we'll break down the essential aspects of valuing a dental practice. We'll explore the key factors that affect valuation and the specific methods used in the dental industry with these questions: 

What Are the Most Common Valuation Methods for Dental Practices

Business Valuation entails closely examining its financial and operational dimensions. For a comprehensive insight, you might want to explore our guide, 'How to Determine the Value of a Business’.

Various methods exist for gauging a Dental Practice's value, with the most suitable one often influenced by the business's unique type and industry:

1. Asset-Based Valuation

Rationale: This method assesses the worth of a dental practice by evaluating its tangible and intangible assets.

Usage: Tangible Assets: Physical items like dental chairs, equipment, office furniture, and property.

Intangible Assets: Elements such as patient lists, practice reputation, and any proprietary procedures or techniques.

Net Worth Determination: Found by subtracting the practice's liabilities from its total assets.

2. Income-Based Valuation

Rationale: By looking at the financial earnings and potential profitability, this method determines the value of a dental practice.

Usage:Discounted Cash Flow (DCF): Forecasts future revenue streams of the practice and adjusts them to today's monetary value.

Capitalization of Earnings: Takes the practice's average earnings and divides them by a specific rate, reflecting projected returns and inherent risks.

3.Market-Based Valuation

Rationale: By contrasting a dental practice with similar practices recently sold or in the market, this method derives its worth.

Usage: Comparative Ratios: Leverages financial standards from similar dental practices to infer a probable valuation.

Recent Sale Analysis: Reviews the sale prices of peer dental practices to understand the current market conditions.

How to Calculate the Value of a Dental Practice

For clarity and practical insights, we'll explore various valuation methods using a hypothetical business example, Dental Wellness Hub:

1. Asset-Based Valuation Step by Step Process:

Step 1: Identifying and Valuing Tangible Assets

Dental Wellness Hub might have tangible assets such as dental equipment, real estate (if owned), and inventory:

  • Dental Equipment: $300,000
  • Real Estate: $600,000
  • Inventory (e.g., dental supplies): $50,000

Step 2: Identifying and Valuing Intangible Assets

Intangible assets could include the clinic's reputation, patient list, or proprietary methods. Let's assume:

  • Patient List: $100,000
  • Reputation/Goodwill: $80,000

Step 3: Calculating Liabilities

Identify liabilities like loans:

  • Outstanding Loans: $250,000
  • Other Liabilities: $50,000

Step 4: Calculating the Net Asset Value

Total Assets (Tangible + Intangible) = ($300,000 + $600,000 + $50,000) + ($100,000 + $80,000) = $1,130,000

Total Liabilities = $250,000 + $50,000 = $300,000

Net Asset Value = $1,130,000 - $300,000 = $830,000

Using the Asset-Based Valuation, Dental Wellness Hub's value would be approximately $830,000.

2. Income-Based Valuation Step by Step Process:

Step 1: Forecasting Future Cash Flows

Let's assume Dental Wellness Hub projects the following net cash flows:

  • Year 1: $200,000
  • Year 2: $220,000
  • Year 3: $240,000
  • Year 4: $260,000
  • Year 5: $280,000

Step 2: Identifying the Discount Rate

Assuming a discount rate of 10%.

Step 3: Calculating Discounted Cash Flows

Year 1 DCF = $200,000 / (1 + 0.10)^1 = $181,818

... and so on for each subsequent year.

Step 4: Estimating Terminal Value and Bringing It to Present Value

Assuming a perpetual growth rate of 3%:

Terminal Value = [$280,000 x (1 + 0.03)] / (0.10 - 0.03) = $4,171,429

Discounted to present value: $4,171,429 / (1 + 0.10)^5 = $2,629,680

Step 5: Summing Up All Values

Assuming total DCF for five years is $1,000,000:

Dental Wellness Hub's value = $1,000,000 + $2,629,680 = $3,629,680

Using the Income-Based Valuation, Dental Wellness Hub would be valued at approximately $3,629,680.

3. Market-Based Valuation Step by Step Process:

Comparative Ratios:

Through industry research, we discover dental practices with similarities to Dental Wellness Hub typically trade at a P/E ratio of 8 and a P/S ratio of 4.

Given Dental Wellness Hub's:

  • Net Earnings: $250,000 (P/E valuation: $250,000 x 8 = $2,000,000)
  • Sales: $700,000 (P/S valuation: $700,000 x 4 = $2,800,000)

Recent Transactions:

Recent sales of similar dental practices have been at about 2.5x their annual profits. For Dental Wellness Hub with profits of $250,000:

  • The valuation would be $250,000 x 2.5 = $625,000.

Average Value Calculation:

  • P/E Ratio Valuation: $2,000,000
  • P/S Ratio Valuation: $2,800,000
  • Recent Transactions Valuation: $625,000

Average Value: ($2,000,000 + $2,800,000 + $625,000) / 3 = $1,808,333.

Based on the Market-Based Valuation, Dental Wellness Hub would have an estimated value of approximately $1,808,333.

How to Buy a Dental Practice

Purchasing a dental practice can be a strategic move for professionals looking to cement their position in the healthcare field. Contemplating this step? Here's a short outline to assist you. For a more in-depth perspective, see our guide on How to Buy a Dental Practice.

Looking into acquiring a dental practice? A Quality of Earnings Report Sniff Test can provide the financial deep dive you need beforehand.

Dental Industry Overview

The dental industry in the US is sturdy, with over 200,000 practicing dentists and a per capita dental expenditure of around $391. Driven by heightened health awareness and technological advancements, owning a practice not only promises financial gains but also autonomy in patient care and treatment protocols.

Dental Practice Acquisition Costs

The financial outlay for acquiring a dental practice varies based on location, patient base, and available equipment. Starting a new practice can range from $300,000 to $500,000, while purchasing an existing one might be more economical, often priced at two to four times its annual net income.

Choosing the Ideal Dental Practice

Initiate your search through industry-specific brokers, dental associations, or direct outreach. Key considerations should include the current patient list, quality and age of equipment, location, and any specialization of the practice. Also, assess the potential for growth or niche services.

Find Funding

Several financing options are at hand, from personal savings to specialized dental practice loans. A detailed dental practice business plan showcasing financial projections and growth strategies will be instrumental when engaging potential lenders.

Conducting Due Diligence

Ensure a thorough review of the practice's financial statements, patient records, and equipment status. Investigate any existing contracts, such as leases and supplier agreements. Evaluating the reputation and any pending litigations or malpractice claims is also crucial.

Closing the Deal

Once you've assessed all factors, negotiate terms based on your findings. Be thorough in understanding all financial, legal, and operational details before sealing the transaction. With careful planning and due diligence, acquiring a dental practice can pave the way for a thriving career in dentistry.

How to Fund the Acquisition of a Dental Practice

Looking to buy a dental practice? The Small Business Administration (SBA) loan is a popular choice. Dental practices are often seen as "active businesses" by the SBA, making them good candidates for such loans. For more details, check out SBA Funding for Dental Practice Acquisition.

In your application, it's crucial to underscore your hands-on involvement in the dental field and any previous experience running or managing a practice. If you're looking at a pre-existing dental practice, providing data on its past performance can be beneficial as lenders often look for assurance that you can successfully operate and grow the practice. Going with an SBA loan offers benefits like competitive rates, flexibility in how you use the funds, and lower initial costs, setting you up for a successful start in your dental career.

Creating Financial Projections for a Dental Practice Acquisition

Each dental practice has unique operational nuances, from patient volume to the range of services offered. When creating financial projections for buying or selling a dental practice, focus on:

Gather Historical Data: Review past patient billing records, procedure frequencies, expenses, and net profit.

Analyze Physical Assets: Assess the condition of dental equipment, examination rooms, and the overall facility.

Forecast Revenue: Consider factors like the current patient base, potential for new patients, and the range of services provided.

Project Expenses: Estimate costs for dental supplies, utilities, maintenance, labor, and professional liability insurance.

Determine Valuation: Combine all financial data, potentially using valuation methods like DCF or asset-based valuations.

Using an acquisition or a dental practice financial template can make this process more manageable. This template integrates income statements, balance sheets, and cash flow forecasts. Equipped with this detailed financial analysis, you're poised to negotiate the value of the dental practice effectively with potential buyers or sellers.

I hope this have been helpful for you, and if you have any questions about valuing your specific practice don't hesitate to reach out to us!

About the Author

Adam is the Co-founder of ProjectionHub which helps entrepreneurs create financial projections for potential investors, lenders and internal business planning. Since 2012, over 50,000 entrepreneurs from around the world have used ProjectionHub to help create financial projections.

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