An economist will tell you a dental practice is worth what someone is willing to pay for it. That’s the correct answer, although a bit cheeky. For a more informative answer we must dig into formulas, supply and demand curves, and profit and loss statements. So, let me say again that the simple and accurate answer is that a practice is worth whatever a seller can get for it.
There is an incorrect notion, entertained by precise dentists who measure success in fractions of a millimeter, that there is some exact number that can be calculated. This is not the case. CPAs, transition brokers, and other experts have varying opinions as to how to arrive at a number, sometimes with significantly different results. So, who’s right?
Here’s what we can generally agree upon. An expert helping you determine a practice’s value will typically use more than one methodology and take an average. One methodology may be based on the value of your assets, both physical and goodwill. One may be based on what similar practices in the region have sold for. Usually there will be at least one formula that accounts for the past few years of revenue and makes predictions on what profits may come. These are some of the best approaches out there, but none of them should be a substitute for your own common sense.
If you’re a seller, there are a myriad of ways to increase the value of your practice in the last few years before you list it on the market. Common sense would tell us not to wait until the last year to start to ramp up production and buy new technology. If you’re a buyer, there are a myriad of additional factors to consider, such as what your daily commute will look like and whether or not your business model can be implemented into the current practice. Common sense would tell us that what a practice is worth on paper doesn’t mean it’s worth that much to you.
Yes, buying and selling a practice is about money. Sellers want to be appropriately compensated for their careers, and buyers don’t want to overpay. But it’s also about anticipating risk and reward, the merging of leadership styles, and peacefully transitioning the care of patients to a new provider. Focus on finding the right number, but also focus on finding the right opportunity.
Cheers,
Chris Salierno, DDS
