How dental practices are valued: the methods and what moves the number
Dental practices are valued with a few methods: a comparison to collections of similar practices, a multiple of adjusted earnings, the value of the assets, and a discounted cash flow. Appraisers often weigh more than one. Value depends on earnings quality, owner dependence, location, payer mix, lease terms and equipment, so a rule of thumb is a starting point, not an answer.
The main methods
- Market (collections) approach: compare with similar practices that sold, scaled to annual collections.
- Earnings approach: apply a multiple to adjusted net income or seller's discretionary earnings.
- Asset approach: add up equipment, supplies and goodwill.
- Discounted cash flow: value projected future cash flows, used more for larger or group practices.
What moves value up or down
- Quality and documentation of earnings, including how defensible the add-backs are.
- How much production depends on the selling owner.
- Hygiene and new-patient flow, and payer mix.
- Location, lease terms and facility condition.
- Equipment age and technology.
- Staff stability and a smooth transition.
Why a rule of thumb is not enough
Published rules of thumb vary by source, region and period, and they hide the differences above. Ask an appraiser who values dental practices, and ask how comparable sales were chosen.
What to do next
Buyers can compare with practices currently listed, noting that asking prices are not sale prices. Sellers often get an independent valuation before they sign a listing agreement.
Related
Common questions
What is a dental practice worth?
It depends on the practice. No single number applies, and asking prices on listings are the seller's ask, not a sale price.
Who can value a practice?
Appraisers and consultants who specialize in dental practices, and some CPAs and brokers. Ask how they select comparable sales and whether they have a conflict, such as a commission on the sale.