First – hire a professional evaluator for real values. This blog is not intended to replace a real world value from a local, trained, and experienced professional.
My opinion is that value is always subjective. What a seller is willing to sell for and what the buyer is willing to pay. Thats the REAL TRUE Value.
I have seen many dental offices over my 30 year career sell for much less than they should have, or much more than they should have. At the same time – it held true to my above opinion….the true value is what one person is willing to sell for and another willing to pay.
Evaluating ANY business is somewhat subjective. I have performed approximately 100 evalutations in my career and been involved in dozens of transitions and sales. Here is what I have found are some key principles to consider and to help value your practice.
Most negotiated value. The Goodwill.
The value of goodwill really has a lot to do with the value of current patients. It’s easy to just look at a number and say “I gross $800,000 a year” and everyone else who has that gross has sold their practice for $800,000.
I think it’s a CRAZY way to get a full evaluation. It’s a good “dirty’ way to come up with a number – and it holds relatively true in many markets. The problem is the differences in practices. Not every practice is just selling the same kind of hamburger. There are often HUGE differences in the practices, even in the same demographic, just a few blocks away from each other.
UNDERSTANDING the value of the charts is UNDERSTANDING the right buyer. That is a strength of using a local company to sell and evaluate your clinic. It’s my opinion that NOT ALL practices sell the same hamburgers, and if the BUYER is not aligned with the SELLER the VALUE of the practice would diminish. There are so many factors here such as growth, demographics, retention, active patients, recall procedures, staff retention and wages, net income!!…this is the most complicated and discussed part of an evaluation with many opinions.
So when I evaluate a clinic, a valuation is based on bringing in the RIGHT buyer who can transition and make profit at the current valuation. Sometimes that means a long wait for a sale, and if that isn’t possible, the REAL WORLD value of the clinic would be different!!
But just quick and dirty – ask what the local market is getting, it’s not too hard and use that as a goodwill number. In my market it’s ‘about’ 1 years gross. In rural areas it’s 6 months gross. Even better – anywhere from 2.5 to 5x net income averaged over the last 3 years.
Second or maybe even the highest value – the location, lease, or property.
In my market it costs $175 a square foot to build a new clinic. I have seen them built for as little as $120 and as high as $250 recently – that is a HUGE range!! The quick and dirty way to evaluate lease holds is to find out current market rates for building new clinics and deduct about 10 – 15% a year deterioration. As long as the leaseholds are ‘renewed’ every 3 – 5 years cosmetically, then the value will likely stay in the range of 30 – 40% of building new.
So in my example, a clinic that recently came for sale has last renovated 5 years ago and is in need of replacing some flooring, paint, etc would evaluate around 40% less than new, so I would say $105 square foot and they were a 7 operatory/2800 square foot clinic
$105 x 2800 = $294,000
NOW here is the CRAZY part that you definitely need a professional to help with. If the space is leased, the lease and landlord themselves need to be evaluated. You are CRAZY if you don’t look at the lease when evaluating the practice. You could easily pay the $294,000 for a space only to find out the old owner didn’t have the right to sell because of restrictions in the lease (it’s been done) or they can re-negotiate the lease at the time of sale (seen it done) and jack up the rent dramatically (it happens) or the lease was up for renewal and the owner had no plans to renew, or was dramatically changing the terms….all components of coming up with a REAL LIFE value of the leaseholds.
If it’s an owned building, you wouldn’t buy it without an inspection and professional evaluation – and yet many practices are sold without an inspection of the lease….funny.
Other important values
Equipment is worth about 20% depreciated cost per year to the point of approximately 20% retained value or ‘opportunity’ value. Usually 10 years plus needs to be replaced anyways. A local equipment guy can usually give a pretty good determination here.
Supplies on hand. rough guess about 3 months of average supply expenditures…or 6% of gross annual income divided by 4. You can take days to count and evaluate – but what groceries you have in your cupboard really don’t make a huge difference on the final sale price, and are really not as valuable to the next guy as they are to the current user. I promise you, the new owner probably eats different food than the current owner.
Instruments on hand. About $1500 per op plus specialty instruments.
Office supplies and equipment – I usually estimate a ‘useful value’ and ‘garage sale’ value. A clock on the wall might be $5, a desk might be $100. Highly subjective, people furnish and buy what they like and may or not hold the same value for a new owner. This is not a huge part of a valuation – so a quick and dirty estimate of 1 – 2% of gross is usually pretty accurate.
Lets work through an average practice to help you.
Transition and contract opportunties.
As you can see, this is a very complicated process. One more wrench to throw at you. There is value in keeping the current owner on to work for the clinic can replace some of the buying price and create cash flow in two ways for a new owner. It allows the selling dentist to make a few dollars, and they are likely to help mentor the new owner without taking a lot of cash flow from the practice. Generally, the practice will increase it’s gross and net income with a transition like this – and there are also opportunities in how this is paid. There are some obvious tax consequences, and retaining the owner for consulting may have some impact on pricing and net proceeds for both parties after tax.
If you want a rough idea – be honest with yourself about the state of your practice. Or better yet, ask a local expert!!
The Everything Dental Guy
Success in Dentistry and Life
“The first rule of being a leader; Everything that goes wrong is your fault!”
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