Valuations of dental practices; a Combination of Science & Art
Most written appraisal reports come with a disclaimer that there is no universal standard methodology for valuing dental practices. There are also an array of false beliefs and strong opinions.
The aim of any valuation is to provide a value that is as objective as possible in an environment of uncertainty.
To reach the total value, you need to consider the future value of the business. Given that the future, by definition, is uncertain - the whole process can never be an exact science. Yet as brokers it is our job to get the best possible market value for both interested parties. I read yesterday, in the quarterly goodwill survey from NASDAL, that valuations had dropped 12% (128% of fee income) and the value for deals completed has risen marginally, with an average goodwill value of 136% of gross fees. So why have values dropped? Is it a result of the methodology used or severe staffing shortages or the current political instability or the economy?
But let’s go back to the valuation topic. You will hear dentists make statements along the lines of – “my practice is worth one and a half times my net income” or another frequent one “the total should be based on a % of my last three year’s collections.” The problem is that neither of these cover the full spectrum and will result in an unfair market value.
The value of any business is based on its cash flow, the risk of the investment and the return on investment for the buyer.
At Pluto Partners we use income-based valuation methods, either discounted cash flows or capitalised earnings to accurately establish a fair value, taking into account both the tangible and intangible assets of a practice before applying a rate of return to the earnings stream. Net asset valuation methods can be used as a reference point.
A seller can give a list of a hundred reasons why they believe that their practice is worth one value but this is matched with a hundred and one reasons from the buyer to why the total is too steep. We must remember that this is a very significant financial decision for the dental practice owners and offer patience and understanding. Nobody wants to overpay, but the real value in dentistry is the ownership of the profit stream over the years.
As a seller, how do you put a value on the years of memories you’ve made between these walls; the friends you’ve made; and the people you have helped? And how does a city buyer longing for a quieter life value a practice in the little picturesque town with the river running through it and great schools for his/her kids just down the road?
At Pluto Partners we have three men who know a lot about valuations - our Director’s Dr Pieter Claassen, Max Bazzucchini and Nick Rolph. Max has been involved in excess of 1,700 dental practice valuations and the sale of over 200! Pieter has experienced the valuation process many times, owning a regional group. Nick acquired more than 130 dental practices for ADP Dental. They help to shape Pluto’s process in tackling the world of valuations with a fair balance.