How to Value a Dental Practice
Dental practices provide dental health maintenance, surgeries, and other dental products for patients. In recent years, the dental health industry has seen healthy growth, generating over $26 billion dollars in profit. In the coming years, IBIS World expects the demand for dental services to remain steady. These conditions are ideal if you are looking to buy, grow, or sell a dental practice. However, many dental practices may face challenges such as shortages of dental health practitioners and the rising unemployment rate. Learning how to value a dental practice may equip you with the knowledge to combat these problems.
The best way to learn how to value a dental practice is to receive a business valuation. As part of a business valuation, a business appraiser highlights the strengths and weaknesses of your dental practice. In addition, you will learn the value of a dental practice. This information is beneficial whether you are buying or selling a dental practice.
Peak Business Valuation, business appraiser, values dental practices on a regular basis. We are happy to provide you with a business valuation for a dental practice. Peak can also answer any questions you may have on valuing a dental practice. Schedule a free consultation below!
How to Value a Dental Practice
When deciding how to value a dental practice, there are various valuation approaches a business appraiser may use. Peak Business Valuation generally uses the market approach and/or the income approach when performing a valuation for a dental practice. During the business appraisal process, a valuation expert determines which method is most suitable for your dental practice. This often includes using a combination of valuation approaches.
Valuing a Dental Practice Using the Market Approach
The market approach is common when deciding how to value a dental practice. This valuation method is similar to the process a real estate appraiser values a house. During the real estate appraisal process, the appraiser analyzes similar properties that were recently sold in the area. This helps them accurately determine the value of a house. When using the market approach, a business appraiser compares similar dental practices that recently sold on the open market. If the business is private, the valuation expert uses private transaction databases to gather information.
Multiples for a Dental Practice
When working with the market approach to value a dental practice, business appraisers use valuation multiples. Valuation multiples are ratios that measure the value of a dental practice in relation to a financial metric like cash flow, sales, or earnings. To find the applicable multiples for a dental practice, valuation experts use the proper NAICS or SIC code. Below, we discuss the basics of valuation multiples for a dental practice.
SDE (Seller’s Discretionary Earnings) Multiple for a Dental Practice
- SDE multiples measure the value of a dental practice based on its seller’s discretionary earnings. This multiple is common when valuing a dental practice.
EBITDA Multiple for a Dental Practice
- EBITDA multiples reflect a dental practice’s earnings before interest, taxes, depreciation, and amortization. This indicates the return on investment a dental practice can expect.
REVENUE or SALES Multiple for a Dental Practice
- REVENUE multiples measure the total amount of sales a dental practice generates. This multiple is less common when deciding how to value a dental practice. However, a business appraiser will determine which multiple is most applicable during a business valuation.
To learn more about valuing a dental practice utilizing valuation multiples, see Valuation Multiples for a Dental Practice.
Valuing a Dental Practice Using the Income Approach
Another common valuation approach for valuing a dental practice is the income approach. The income approach measures the value of a dental practice by determining its future earning potential. In addition, the income approach considers the risks associated with buying or selling a dental practice. We list some of these risks below.
- Skilled Staff: It is vital for dental practices to have a skilled staff. Dental practices should hire individuals who meet education and experience requirements.
- Customer Service: Dental practices are responsible for the health and safety of its patients. As such, it is vital to ensure that patients are comfortable by honing good customer service skills.
- Technology and Equipment: Dental procedures require special technology and equipment. It is important to ensure that your dental practice invests in high-quality technology and equipment.
- Regulatory Compliance: There are many regulations and policies designed to protect dental patients. As such, it is vital for dental practices to be aware of and follow regulations.
Methods to Value a Dental Practice Using the Income Approach
Under the income approach, there are two common methods for valuing a dental practice. They are the capitalization of cash flow method and the discounted cash flow method. Both methods help determine the value of a dental practice based on its income potential. See the following paragraphs to learn how to value a dental practice using these valuation methods.
Capitalization of Cash Flow Method
- The capitalization of cash flow method is typically used for dental practices with a stable history. This method determines an appropriate amount of economic income for one period. The income is then divided by a capitalization rate which reflects an appropriate rate of return an investor can expect. This method also assesses the risks associated with buying, growing, or selling a dental practice.
Discounted Cash Flow Method
- The discounted cash flow method relies on 3-5 years of earning projections. Business appraisers divide the future earnings using a discount rate rather than a capitalization rate. This helps them determine the value of a dental practice based on the time value of money. This valuation method is best for dental practices that have strong financial histories. It is also useful for businesses with reliable forecasts. Keep in mind, the discounted cash flow method is less common since it uses future cash flow estimates which can be inaccurate.
Summary
There are various valuation approaches a business appraiser may use when valuing a dental practice. Business appraisers often use the market approach and/or the income approach. These methods provide important insights to help business appraisers determine the value of a dental practice. To learn which method is most suitable for your dental practice, receive a business valuation. As part of a business valuation, a business appraiser calculates the value of a dental practice you are buying, growing, or selling. In addition, they highlight the strengths and weaknesses associated with your dental practice. This information is crucial if you are looking to maximize the value of a dental practice.
Peak Business Valuation, business appraiser, is happy to help! At Peak, we work with many dental practices throughout the nation. We are happy to provide you with a business valuation for a dental practice. In addition, we can discuss any questions you have about how to value a dental practice! Schedule a free consultation with Peak Business Valuation, business appraiser, below!
See also Valuing a Dental Practice, Valuation Multiples for a Dental Practice, and Value Drivers for a Dental Practice.
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