A calculation of value is an important and often required element of dental practice transitions. Whether you are acquiring or nearing retirement and interested in selling the practice you have spent your whole career building, a calculation of value will play an important role in shaping the negotiations.
Most calculations of value utilize multiple valuation formulas averaged together to arrive at a final estimate. Utilizing different methodologies builds confidence in the end value and identifies outlying financial or practice data that may cause a deviation.
Three common valuation methodologies for solo or small group practices:
- Capitalized excess earnings – Excess annual earnings are calculated by deducting from average annual net receipts, average annual operating expenses and professional compensation (typically estimated at 35% of average annual net after adjustments for doctor production). The resulting average excess earnings are then divided by a risk factor (capitalization rate), determined by the degree of risk involved. The capitalization rates typically range from 15% to 30%.
- Annual net receipts – This method of analysis measures a practice based on the average annual net receipts over the last three years. It is typical for the percentage utilized to fall in the range of 50% to 80% of the average annual net receipts
- Average annual earnings – Annual net earnings is multiplied by a factor determined by comparing data from other sales and purchases of other dental practices in the state and surrounding region during the past few years. Most current data on value suggest that the value of practices to be in the range of 150% to 200% of the average annual earnings available to the owner’s in a non-rural community.
It is important to have advisors who are able to review the financial and non-financial data as well as the underlying practice metrics to determine if the results shown can be improved or if the practice lacks sustainability. Analyzing the results of the valuation to address the opportunities and threats it unearths is where the real “value” lies.
Click here to read the full article which dives deeper into each calculation methodology.
