How Much Is My Dental Practice Worth?

When you make the decision to sell your dental practice, it’s a good time to take a step back and look at your business objectively. For some dentists, it can be hard to separate the years of “sweat equity” they’ve put into their practice from its actual monetary worth; for others, it may be difficult to fully grasp the value of what they’ve built, and what they stand to gain from selling. In either case, understanding the true worth of your dental practice is the first step to making informed decisions about its sale.

So how do you obtain an objective valuation for a dental practice for sale? Is there a good way to calculate both tangible values like assets and income along with intangibles like goodwill and reputation in the community? In this blog post, we’ll explain how dental practices are valued, the factors that affect their worth, and how you can quickly determine a value for your dental practice before you start preparing to list it for sale.

What You’ll Need to Calculate a Price For Your Dental Practice

For the most accurate valuation, you’ll need to gather several key pieces of information about your dental practice. While it is possible to get a ballpark valuation with very little information, the more documentation and hard numbers you bring to the table, the more accurate the price for your dental practice will be.

1. Financial Statements

This includes balance sheets, production reports, and tax returns for the past few years. Financial documentation is critical, as it provides the clearest picture of the financial health of your dental practice, as well as its growth trajectory over the years. Without an in-depth understanding of the cash flow of your business, prospective buyers will be hesitant to make an offer or you may leave money on the table.

2. Patient Records

In addition to the financial statements, you’ll want to have complete records of your patient base. This includes patient demographics, treatment plans, and insurance information. Understanding your patient base gives potential buyers insight into the stability of your practice and potential areas for growth.

3. Tangible Assets

Your tangible assets include all of the physical property and equipment associated with your dental practice. This includes everything from dental chairs and x-ray machines to copiers and desks—all of the physical items you own in the practice. It’s important to not only have a detailed list of these assets, but also their current market value—not the cost of purchasing a new x-ray machine today, but the depreciated value of the machine you currently have in your office.

4. Real Estate

If your dental practice operates in a building you own, the valuation of the real estate is another critical component in determining the overall worth of your practice, and it can drive up the price for your dental practice significantly. As with any real estate deal, factors to consider here include its location, number of ops, accessibility, and any leases you may hold for other tenants in the building. When real estate is part of the sale equation, it’s important to work with a professional appraiser to obtain an accurate assessment of the property.

Other Factors in the Cost of a Dental Practice for Sale

When determining the cost of a dental practice for sale, several additional factors must be considered. While these factors are harder to assign monetary values to, they play an important role in the valuation.

1. Location

The location of your practice is important; practices in high-demand urban and suburban areas typically command higher prices due to accessibility and patient demographics than those in sparsely populated rural areas. Prospective buyers may also consider the overall desirability of the area, such as the quality of local schools, when evaluating the worth of a practice.

2. Reputation and Goodwill

The reputation of your dental practice is an intangible asset that adds value to your business. A strong reputation built by providing top-quality patient care, positive reviews, and word-of-mouth recommendations from patients can greatly influence the price you can command for your practice. Another component of reputation and goodwill is employee turnover and reputation among colleagues in the area.

3. Growth Potential

Although financial statements play a role in determining growth potential, there are also some less tangible factors at play. Demographic trends in the area (i.e., are people moving to the area or moving out?), the potential to expand services, and the availability of new technology and treatments can all influence growth potential for a dental practice.

4. Market Trends and Economic Factors

While related to growth potential, which is more on a microeconomic level, market trends are macro. Factors like changes in insurance networks and shifts in the economy can impact the value of your dental practice. As an example, patients may delay cosmetic dentistry or dental implants during an economic downturn, and when unemployment is high, even general dentistry may suffer. Unfortunately, you have little control over these factors, although you can optimize the timing that you put your dental office for sale to get the best sale price.

3 Common Types of Valuations for Dental Practices

When it comes to valuing a dental practice, there are three methods that professionals commonly use: the asset-based approach, the income approach, and the market approach. Each of these approaches offers a different perspective on the practice’s value; as a seller, you will naturally want to choose the method that yields the highest price for your practice, but a buyer may make a counter-offer based on a different method that produces a lower value, so it’s a good idea to be familiar with each of these methods.

1. Asset-Based Valuation

This back-of-the-envelope method focuses on the tangible and intangible assets of the practice, including equipment, furniture, and patient base, as well as liabilities. By calculating the difference between total assets and liabilities, you can arrive at a net asset value. This approach is commonly used for practices that have high-value physical assets.

2. Income-Based Valuation

Here, the valuation is based on the future cash flow potential of the practice. This method involves estimating the expected cash flows over a specified period by looking at previous income and expenses then factoring in current market trends. The income-based approach is particularly advantageous for practices with consistent revenue streams and strong growth metrics, as it reflects the practice’s ability to generate and grow profits in the future.

3. Market-Based Valuation

This valuation method compares your dental practice to similar practices that have recently sold in your market. By analyzing these comparative sales, you can determine a fair market value for your own practice. Factors like location, specialties, size, and patient base are taken into account, making this approach useful for aligning price with current market trends and demand. Sale prices for dental practices are often based on percentages of yearly gross revenue (usually ranging from 70% to 100%) or a multiple of projected profits, such as 2.2 times annual profits.

Get a FREE Orbit Estimate for Your Dental Practice

Rather than crunching the numbers yourself, you can use Practice Orbit’s free dental practice valuation tool to get an accurate estimate of your business’s value with minimal work on your part. The Orbit Estimate takes into account the most essential factors mentioned above.
If you’re simply starting to test the waters prior to selling, a Level 1 estimate may be right for you. The only information needed for this estimate is your dental specialty, the state where you’re located, and your annual collections. With this information, we will provide you a range for the cost of your dental practice.

Once you’re more serious about selling, you’ll want to obtain a Level 2 estimate. We’ll need additional information from your IRS tax forms for this estimate, but the range of prices for your dental practice will be more accurate.

By using this tool, you can save time and ensure you have an objective understanding of your practice’s worth before listing your dental office for sale.

The Bottom Line

Listing your dental office for sale is a milestone that marks the end of one chapter and the beginning of another. As such, it’s not uncommon for practice owners to let their emotions override the practicalities of the sale. Taking an objective approach based on your practice’s value, market trends, and growth potential will allow you to maximize your sale price so you can move on to your next venture. Tools like Practice Orbit can help; in addition to our Orbit Estimate, we offer a full range of services to help you complete a successful sale. Learn more about Practice Orbit by contacting us or sign up now to get started.