When is the Right Time to Have a Practice Valuation?
6 times a dental practice owner would need to get a practice valuation from an accredited expert. With Kevin Brady, Practice Transition Advisor, OMNI Practice Group.
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When is it Time to Value Your Practice?
By Kevin Brady, Practice Transition Advisor
Transitioning the practice is probably one of the biggest decisions a dentist will make in their career. Deciding whether to transition the practice to a partner, associate, a new dentist, or corporate dentistry, you will need a plan and experts to help you make the right decision.
3 to 5 Years Before Retirement
Having a financial plan when you are 3-5 years out from selling your practice will allow you to know what the total value of your assets are and what value is needed from your practice to afford to retire. Knowing the value of the practice 3-5 years out will also allow you to focus on reducing debt, increasing production, and collections, which are critical factors in determining the practice valuation.
When developing your financial plan, you will need to have your CPA do a thorough review and analysis of your financials and advise of any necessary adjustments. This would include family members on the payroll who don’t work in the office, expenses that are above industry averages, and other expense benefits being run through the practice. Review your internal and external marketing programs with your marketing professional to focus on increasing new patients and adding additional revenue to the practice.
1 to 2 Years Before Retirement
Once you have an established financial plan and are 1-2 years from retirement, you need to find a dental broker to help with a practice valuation and options for selling your practice.
The benefits of enlisting a professional dental broker are:
- Independent and accredited appraisal of your practice’s worth, the patient population, equipment, and, if applicable, the real estate.
- Knowing what your minimum sales price will need to be to meet your financial goals to retire.
- Exploring the different buyer options for the sale and which one is right for you.
- Developing a marketing plan for your practice that will keep it confidential until a buyer is found.
- Determining the average length of time it will take to market and sell your practice.
- Identifying what improvements or changes could make the practice more attractive to potential buyers.
1 Year or Less Before Retirement
It is time to implement your plan to sell the practice. The average practice takes 6-8 months to sell Pre COVID-19. Some rural practices might average 18 -24 months to sell. Enlisting a professional broker will save you time putting together a marketing prospectus and then marketing the practice locally and nationally. A broker can also assist you with updating your valuation to determine the asking price for the practice. Keys areas to focus on with less than a year are reducing as much debt as possible and keeping the hygiene and doctor production as high as possible.
There is no doubt that the COVID-19 pandemic has created new considerations for anyone who is considering selling their dental practice. Selling a dental practice doesn’t happen overnight. Developing a plan with experts can ensure you get what you want out of a sale while maximizing your dental practice’s value and allowing for a smooth transition to the purchaser.
Omni Practice Group has been helping dentists for over 15 years develop plans for dentists to transition their practice. Our goal is to help you find the right buyer and make a smooth transition of your practice when the time is right.
Contact us today for a free no-obligation consultation with one of our Practice Transition Advisors. We are here to help – Kevin@omni-pg.com.
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The Importance of Dental Practice Valuations
Common Reasons for Dental Practice Valuations
There are several reasons doctors need to know the value of their dental practice. The most common reason is for dental practice transitions or sales. Valuations help to determine if the asking price is reasonable, to figure out a reasonable asking price to begin with, and to ensure the practice is profitable enough to invest in; this is also important to know when considering a merger. Doctors should also get their practice valuated within ten years of retirement and every two years after for estate planning purposes. Therefore, it is important to make sure the valuation is not a cookie cutter process.
Rule of Thumb Should Not Apply
No two dental practices are the same, so no two valuations should be the same. Often dental practice valuations are conducted using a rule of thumb method. The method does a major disservice to both the seller and the buyer, as it often does not highlight the practice’s uniqueness and how that influences the actual value of the practice in question. For a true valuation, many aspects of the practice must be taken into account and evaluated by experts with extensive formal training and resulting certifications, such as the experts at OMNI Dental Practice Group.
Experience Matters
When looking into dental practice valuations, it is important to make sure the professionals have extensive experience performing said valuations. The team at OMNI Dental Practice Group; for example, have helped hundreds of doctors buy and sell their practices using accurate valuations based on the practice itself and are considered dental industry experts in practice valuations. As members of the Institute of Business Appraisers and the Practice Valuation Study Club, OMNI Dental Practice Group offers accurate and individualized valuations for dental practices in Washington, Oregon, and California.
To learn more about why and how dental practice valuations are conducted, or to request a free consultation in the Washington, Oregon, or California areas, please contact the expert staff at OMNI Dental Practice Group. OMNI’s team of experts are dedicated to ensuring each client’s success through transitions, valuations, consulting and other real estate services in the dental field.
How Do Dental Practices Get Valued?
So, you found a practice you like and it has a price tag of $500,000. How do you know the dental practice is valued correctly? A short answer is that the price, or value, is what a willing, knowledgeable and unpressured buyer along with a willing, knowledgeable and unpressured seller would be willing to exchange for a property or asset.
I can probably write a short, very boring book, on valuing a dental practice. But, no one would buy it and no one would read it. So, I’ll keep this short and if you want more information, you can call or e-mail me.
A rule of thumb: value that is often quoted for the northwest is between 65% and 75% of the last 12 months collected production. If you’re in a metropolitan area like downtown Seattle, Bellevue, Redmond, etc., it will be on the high end, possibly more. If you’re in a rural area, you’ll be on the low end and possibly less.
When I do a formal appraisal on a practice, I use standards approved by the Institute of Business Appraisers, of which, I am a member. These methods take into account not just the collections of the practice, but more importantly, the income of the practice. Why is this? Well, would you buy a $1 million practice with a net income of $100,000, or a $500,000 practice with a net income of $200,000? Don’t answer out loud unless you’re certain of the answer.
We, at Omni, use three methods – capitalization of earnings, asset value, and production acquisition that blend three areas of the practice – earnings, assets and production, to get a true value of the practice. In summary, when you look at the price of a practice, you can start with a rule of thumb to get an idea of whether the practice is priced right. But, in the end, a full valuation is needed to determine the true value.
-Rod Johnston, MBA. CMA