When owning a dental practice, it is vital to not only know the value of your dental practice, but also to understand how value is determined. While this valuation is generally conducted by a CPA, being well-informed about the process is helpful. There are several factors that go into the valuation:
Capitalization of Earnings
By looking at the last 3 – 5 years’ earnings, a fairly accurate average is determined. This number is divided by the capitalization rate. The capitalization is a broad term for the rate of return or the risk that a buyer would face. To create a proper rate, a CPA should have an intimate knowledge of how a practice us run so they can use factors such as treatment planning, staffing, and patient flow.
Discounted Future Cash Flows
This is a way to look at the practice’s expected cash flow and try to determine if there is a potential for a good investment. Take the practice’s latest annualized earnings, subtract the average tax rate, and finally divide by the discount rate.
Comparable Sales Method
By looking at similar practices, the valuation of the current practice can also be better understood.
Something that many people incorrectly assume is heavily part of the assessment is past performance. It is generally understood that past performance is not a reliable enough factor for determining the future of a practice. Instead, the important data points are from performance trends, overhead percentage, the age of the practice and assets used, and accounts receivable.
Once the methods mentioned above, along with a few other methods, are used to determine the practice’s value…this is only the beginning! Using this information, it will help you greatly to determine a sale price for the practice you are selling, or if a practice is worth investing in.