A dentist’s guide to dental practice valuation methods

Practice calculations of value

A calculation of value is an important and often required element of dental practice transitions. Whether you are setting out on the adventure of owning your own practice or nearing retirement and interested in selling the practice you have spent your whole career building, a calculation of value will play an important role in shaping the negotiations surrounding the transition. The calculation marks the beginning of the transition process as it helps determine affordability for the purchasing doctor and future financial planning for the retiring doctor. The goal of this article is to shed some light on the different methodologies used to value a dental practice and provide a basic understanding for any doctor who may be looking at a value calculation in the future.

Calculations of value – the basics

Most calculations of value utilize multiple valuation formulas averaged together to arrive at a final estimate. Utilizing different methodologies builds confidence in the end value and identifies outlying financial or practice data that may cause a deviation.

Common valuation methodologies:

• Capitalized excess earnings
• Asset value
• Annual net receipts
• Average annual earnings

Typically, historical financial information of the practice is utilized to produce the calculated value under these scenarios. However, it is important to have advisors who are able to review the financial and non-financial data as well as the underlying practice metrics to determine if the results shown can be improved or if the practice lacks sustainability. For example, maybe the patient base is unique without adequate new patient numbers. Maybe specialized dentistry is important to the total revenue, can this be duplicated? This could be very problematic for a new owner if they were not aware or able to plan for this ahead of time. Also, maybe there is a high amount of treatment diagnosed, unaccepted or non-completed dentistry on the books, which provides an opportunity for a revenue increase for the new doctor with good patient acceptance skills. These intricacies are why the valuation should be viewed as a launching point for further analysis done by trusted advisors.

Capitalized excess earnings