Practice Valuation – The Basics

“Dental practices sell for approximately 70% of last year’s gross receipts, right?”

We find it fairly common to be asked this question…which leads to a discussion on baseline valuations and how they are performed for a dental practice.

Baseline valuations are based on two classes of assets: tangibles and intangibles.

Intangible assets include, among other things, practice location, goodwill and reputation.  Tangible assets include, among other things, equipment, technology/software, and the condition of the physical office space and furnishings.  Typically speaking, the breakdown between intangible and tangible assets in a basic valuation is 75/25 percent.

Of course, other factors go into any basic valuation.  This includes:

1)  Patient Base – the more active patients the better.  A family practice with a wide range of ages is better than a practice with only an older population.

2)  Profitability – like any business, one must look at a practice’s margins to determine whether the valuation should include a premium.  Practices with high overhead in the form of staff salaries and/or rent may inhibit the ability to pay a large loan back to the bank.

3)  Physical Condition of the Premises – this takes into account the physical building space, the condition of the equipment and supplies, and furnishings like carpet, flooring, ceiling tile, paint, etc.

4)  Location and Demographics – simply stated, a practice in the heart of Dupont Circle in Washington, D.C. will include a premium versus one in a more rural area.  New dentists like to live in urban/suburban settings, thus the location could account for a large portion of the intangible side of the valuation.

5) Miscellaneous Economic Variables – a practice that thrives on public and private insurance patients only will not be as attractive as a pure Fee For Service practice.  In addition, one would look to see whether more expensive procedures (endo/perio/ortho) are kept in-house or referred out to others.

Practices do often sell for approximately 70% of the previous year’s gross receipts, especially in the greater metropolitan Washington, D.C. area where we see higher numbers based on the factors outlined above.  Specialist’s practices can of course be higher.

We can be reached at 202-888-1732 with any questions about dental practice valuations.

The Strisik Law firm is a Washington D.C. Business and Health Care practice.