Do I Need a Dental Practice Appraisal?
The question of “do I need a dental practice appraisal” often comes up when working with clients. The simple answer is yes. Here are a few of the instances where practice owners would need an accurate dental appraisal, or valuation:
- Selling a Dental Practice
- Buying a Dental Practice
- Hiring Dental Associates
- Navigating a Merger
- Taking on a Partner
- Entering into Litigation
- Estate Planning
- Securing a Letter of Instruction
In each of these situations it’s critical to have an up-to-date assessment of the current market value of the dental practice, though for different reasons. It’s recommended that all practice owners value their practice every year. Complete our dental practice appraisal inquiry form to begin the process.
What is a Dental Practice Appraisal?
A dental practice appraisal is a formal opinion prepared by a dental broker that states the practice’s market value based on all the pertinent information about the subject. An accurate appraisal is key when selling or buying a dental practice, but can also be helpful in several other instances.
What goes into valuing a dental practice?
There are many factors that make up a comprehensive valuation, including:
- Gross income
- Net income
- The fee schedule
- Staff information
- What type of insurance and/or payment is accepted (e.g., PPO, HMO and Medicaid insurance participation)
- Total number of active patients
- Number of new patients a month
- Specialties and procedures done in-house
- Patient and area demographics
- Market issues
- The practice’s goodwill
The above list is far from comprehensive. All dental practice valuations should include a written report and must be based on all the relevant information and not just selective pieces. This includes both tangible and intangible aspects of the practice. Want to learn more?
Free Dental Practice Appraisals Versus True Valuations
Some dental practice transition specialists and consultants offer a Free Appraisal or Free Valuation of a practice when seeking to represent a seller. Unless specifically indicated, this will most likely be an Opinion of Value based on a Rule of Thumb approach -- not a true valuation.
So, what’s the difference? Why should practice owners secure a true valuation? Learn more about accurate dental practice valuations in our Complimentary Practice Valuation Guide.
Using a Rule of Thumb for Dental Practice Evaluations
A Rule of Thumb consists of limited information and typically applies an arbitrary multiplier to that information to arrive at a value. Some common Rule of Thumb valuations we hear are:
- The dental practice is worth 70% of gross revenue
- The practice is worth one times net income
Neither of these valuations are an accurate representation of the dental practice value. This approach provides practice owners with a surface-level look at the business as it currently stands. You could refer to this as a dental practice evaluation, as it is far less substantive than a true valuation.
Wondering why it’s important to know the true value of a dental practice? Read our Top 10 Reasons Why You Need a Practice Valuation today.
An Example of Rule of Thumb Dental Practice Evaluation
Two practices each collecting $1,000,000. One has an overhead of 50% and the other an overhead of 70%.
Using the “70% of gross revenue” Rule of Thumb, each practice would be worth $700,000.
In reality, the first practice is significantly more valuable than the second because of the larger profit. Similarly, if one practice has state-of-the-art equipment and technology and a second has 20-year-old, non-digital, out-of-date equipment, it is obvious the first practice is worth more (but how much more?).
Additionally, none of these assessments take into account some of the most important factors in valuation, the intangible factors, or the active patient base.
What Does A Formal Dental Practice Valuation or Appraisal Consist of?
A dental practice appraisal includes all relevant practice information and provides a formal written report. The report can be a:
- Comprehensive Report - usually from 50 to 70 pages of information that includes supporting documentation
- Limited Report - usually from 2 to 4 pages plus supporting documentation
Both reports have completed the same analysis, the difference being that significantly more data and discussion is included in the Comprehensive Report, where the Limited Report is a summary of the information without much in-depth discussion of the data or findings. Both formal reports must be signed and dated by the appraiser.
How to Accurately Value Your Dental Practice
Unfortunately, there are transition specialists, brokers, and consultants who will tell a seller what he or she wants to hear in order to engage a client. If the seller thinks the practice is worth $500,000 but an official dental practice appraisal suggests it is really worth $350,000, the seller is going to be more inclined to engage the broker who tells him the practice is worth $500,000 - even if the transition specialist knows the practice will end up selling for $350,000. Often, the broker has a contractual period, usually a year, during which the seller will be obligated to work with the transition specialist.
An honest dental practice transition specialist is going to tell you what the market value for the dental practice is, providing you with a realistic and actionable price that you can count on. The valuation does not have to be in the form of a written report, either. Comprehensive or Limited, the analysis that the transition specialist does comprises all of the pertinent information that would go into a formal written report.
Do I Need a Dental Broker for a Formal Practice Valuation?
Working with a trusted Dental Broker is the best way to receive an accurate dental practice valuation. Some banks that finance the transaction will certainly want the same information that the transition specialist or consultant has used to arrive at a sale price as a requirement for financing. In the case of litigation, partnerships, mergers or estate planning, it is probable that a comprehensive written appraisal report from a reputable dental brokerage would be required.
For Doctors Who are Veterans in Practice
Since your practice is one of your most valuable assets, doesn’t it make sense that you would want to know its true value? We encourage all dentists to periodically have their dental practice appraised as an element of their net worth, transition strategy planning, and estate planning purposes. Not only does it give you the peace of mind to know what your practice is worth, the process can turn over rocks and open shades that allow you to be more effective, efficient, and profitable - now and in the future. Not only does an appraisal help you in the short term and allow you to sleep better at night, but it could also be a long-term benefit for you, your family, and your retirement.
For Younger Doctors
Since buying a dental practice is probably one of the most important decisions of your career, doesn’t it make sense that you would want to know its real value? Understanding dental practice appraisals and valuations - and the information and terminology they use - can make all the difference.
Transition Management, Buying, or Selling a Dental Practice with Henry Schein
Operating in all 50 states, our consultants have provided expert guidance for dental practices all over the country. Our consultants include practicing dentists, specialists, and subject matter experts who have worked with dental professionals in major cities, suburbs, small towns, and rural communities.
Whether you’re ready to sell your dental practice, buy a dental practice, or investigate your transition options, the Henry Schein Dental Practice Transitions team is here to help.