Determining a dental practice valuation isn’t always as straightforward as you might think. In fact, many dentists don’t know how to value an orthodontic practice, making it difficult to buy or sell even the most successful practice.
There are many reasons you should know the value of your practice. The most obvious reason is for the sale of a practice, but value plays a prominent role in partnerships, mergers, and planning for the future. Similarly, knowing company valuation plays a significant role in a purchase decision. You certainly don’t want to be taken advantage of or feel like you’re not making the revenue you’d previously expected.
Key Factors in Dental Practice Valuation
Valuation is vital to every business. It’s the monetary worth of a corporation or practice. The value of an orthodontic practice is the practice’s market value influenced by information like the following:
- Gross and net income
- Variable and fixed expenses
- Expected revenue and growth
- The number of active patients and the rate of new patients
- Area demographics
- Staffing information, including turnover and compensation
When learning how to value an orthodontic practice, you’ll need to understand the methods used to determine any business’s value. The most commonly used methods include capitalized excess earnings, asset value, annual net receipts, and average annual earnings.
Capitalized Excess Earnings is one of the most basic valuation tactics. This income-based method breaks down the value of a practice by considering factors such as net revenue, excess earnings, dentist compensation, collections, operating costs, etc. Additionally, this method helps determine the degree of risk involved in investment, which influences the overall value.
Asset Value determines the value of an orthodontic practice based on tangible and intangible assets. Examples of tangible assets include equipment, dental supplies, and instruments, while intangible assets include patient lists, supply and demand, and demographics.
Annual Net Receipts measure the value of a practice by reviewing average sales of comparable orthodontic practices within the last several years. These averages are based on local community transactions or state averages.
Average Annual Earnings determines a valuation strictly based on the average earnings of the current owner of the practice. While this methodology is similar to capitalized excess earnings, it does not factor certain expenses, including dentist compensation, when determining value.
While dental practice valuation is vital to every buyer, it’s not the only thing you should consider. Other factors to keep in mind include the following:
- If a practice has substantial patient gains or losses
- The practice location
- The risk of investment
- The practice’s collection rate
- The practice’s reputation
Find Reliable Consulting Services for Orthodontic Practices
Whether you’re buying, selling, or developing a thriving orthodontics practice, Peniche & Associates can help. Peniche & Associates provides quality services for dentists in many areas to help determine and improve dental practice valuation and obtain finances for a smooth and profitable transaction.
If you’re interested in purchasing a practice, Peniche & Associates can help you make the most of your investment through practice development, marketing branding, financial management services, and more.
Contact Peniche & Associates today to learn more about our consulting services for orthodontic practices.