Even if you love what you do, you probably don’t want to work forever. That’s certainly true of many dentists, who may decide to step away from their practices in order to pursue other passions later in life. If you’re planning to sell your dental practice in the future, it’s essential that you have a clear idea about what it’s worth. If you don’t know the value of your practice, you may be tempted to overestimate its worth (and subsequently make a transition much more challenging).
But what exactly goes into a dental practice appraisal? And is it possible to skip this step and still manage to sell your practice? We’ll answer both of those questions in today’s post.
What Determines the Value of a Practice?
Some dentists have misconceptions about what certain numbers mean for the value of their practices. For example, there’s a widely held belief that a given practice is worth 1.5 times the owner’s income or that a practice’s worth is equal to 70% of annual collections from the previous few years. Unfortunately, these figures really don’t indicate the value of a practice.
That said, there are a number of important factors that can be used to determine the value of a practice. Typically, the value of any business will be based on its cash flow, its return on investment for the buyer, and the risk of investment. But within those categories are different methods for appraising a practice. Capitalized earnings or discounted cash flows are often utilized to determine a practice’s income based value, both of which include both tangible and intangible assets. Net asset valuation may also be used, which determines the value of tangible equipment and other assets as well as practice goodwill (meaning its reputation).
Market data is also used to determine a practice’s value, meaning that comparable practice sales figures may be taken into account (just like comps are used when looking at home values). This method isn’t always the most reliable, as it may require you to compare dissimilar practices operating in the same area. But it can sometimes provide important information as part of your appraisal.
Other data may be used in your dental appraisal, as well. Factors like the location of your practice, the amount of overhead you pay for your offices, the number of patients a practice has in its roster, potential payment terms and practice fee schedules, and even the age of the dentist looking to sell the practice may all come into play.
If you’re looking ahead to the future and want to find ways to improve your practice appraisal, you might be able to take action in the present. Dentists who plan to sell their practice down the road should maintain a high level of activity within the practice, rather than cutting back on hours, to ensure productivity and operations are up to speed. This can make your practice more desirable to a buyer. Focus on growing your patient base and on updating equipment, as both of these considerations will also play a part in your appraisal. You may also want to highlight your practice’s marketability and even increase your efforts to offer insurance coverage to patients; this will help bring in new patients and satisfy your current patient base, but it will also make your appraisal more appealing and entice buyers.
Why Are Dental Appraisals Necessary For a Successful Dental Practice Transition?
As a whole, the dental industry is extremely valuable. In just the last five years, this sector has grown by 2.5%, reaching $135 billion in revenues during 2019. But that doesn’t mean that all dental practices are considered to be highly valuable.
Most business owners are inclined to believe that their businesses are worth more than they actually are. Operating under false assumptions can prove disastrous later on. You may discover too late that you should have handled operations differently or be disappointed that you won’t have the opportunity to retire as soon as you had hoped. Knowing the true value of your practice sooner rather than later can allow you to make better choices in the present and plan ahead for the future.
What’s more, obtaining a dental appraisal will show buyers that you have proof of your practice’s value and that you’re determined to have a smooth transition. The more information you have and that you can provide to others, the more appealing your practice will actually be. In fact, having an accurate practice appraisal will typically allow you to sell your practice more quickly. It can also increase your ability to plan for retirement and decrease the risk of having a dental practice transition fail during the process.
In other words, obtaining a dental appraisal is an essential for professionals who want to sell their practices. Whether you want to sell right away or are planning for 10 years down the road, this step is a vital one in ensuring you’ll be able to find viable buyers and transition your practice successfully. For more information on dental appraisals and how we can help you take that next step, please contact us today.
