Dental practice appraisal

If you are considering a dental practice appraisal, here are some interesting industry statistics:

There are over 133,000 privately owned dental practices in the US alone, classified under the SIC 8021 and NAICS 6212. Dental practices are a large part of health services and generate around $104B in annual revenues growing annually at 11.6%.

Yet an average dental practice is a small service business – employing a staff of 6 – 7 and producing some $787,000 in annual sales. Revenue per employee is about $119,000. Dental practices employ some 882,700 staff.

Dental practice valuation methods – comparable practice sales

Practice sales happen regularly so there are plenty of comparable data to use for valuing a dental practice. There are a number of valuation multiples to choose from, each giving you a different way to determine the practice value. Here are the top ones most often used to price a dental practice for sale:

• Practice sale price to gross profit.
• Sale price to total invested capital.
• Practice sale price to net sales.
• Sale price to discretionary cash flow.

Surprised by this list? Well, the traditional way to assess a dental practice value has relied upon the net sales or gross annual revenues. However, the market for dental practices is quite dynamic and pricing trends change over time.

We keep an eye on the spread of actual practice selling prices from the average. This is handily captured by the coefficient of variation – the smaller this number the tighter the selling prices cluster around the mean. If you want to estimate your practice value, use the valuation multiples with the smallest coefficient of variation first. This means that practice buyers out in the market rely on these multiples more often when pricing acquisitions.

Recent dental practice sales data show that the gross profit based valuation multiples can give you the most accurate estimate of current practice value. In fact, its coefficient of variation is just 0.39 compared to 2.39 for the net sales based multiple.

Example: How to price a dental practice using multiples

Consider an average private dental practice generating $300,000 in annual net sales, having a gross profit of $275,000; discretionary cash flow of $100,000; and market value of all invested capital, which includes the practice assets and long-term liabilities, of $85,000.

Let’s take reasonable values of the respective valuation multiples for use in our value calculations:

• Sale price to gross profit: 0.7.
• Sale price to total invested capital: 2.
• Sale price to net sales: 0.6.
• Sale price to discretionary cash flow: 1.7.

Applying these valuation multiples gives us the following practice value estimates:

• Based on gross profit: $192,500.
• Based on total invested capital: $170,000.
• Based on net sales: $180,000.
• Based on discretionary cash flow: $170,000.

This gives us the average practice value of $178,125.

By convention of professional practice appraisals, the value includes all tangible assets and practice goodwill. It does not include cash, accounts receivable, liabilities or real estate. The value of earnouts set aside as a contingent part of the selling price, if present, is also excluded.

Other methods for dental practice valuation

As in other health care practice valuations, the value of a dental practice is driven by its earning capacity. You can use a number of income based valuation methods to determine what your practice is worth. Both Multiple of Discretionary Earnings and Discounted Cash Flow methods are frequent choices in dental practice appraisals.

For an established practice, consider using the Capitalized Excess Earnings method that lets you estimate the value of practice goodwill. This may well make up a large part of the overall practice value.

See Valuation Tour