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

There are over 147,000 privately owned dental practices in the US alone, classified under the SIC 8021. Dental practices are a large part of health services and generate around $44.6B in annual revenues. Yet an average dental practice is a small service business - employing a staff of 6 and producing some $300,000 in annual sales.

Dental practice valuation methods - market comps

Practice sales are a frequent occurrence 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, in the order of accuracy:

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

The lineup may be surprising to some - a 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 pay close attention to the spread of actual practice selling prices around the average. The measure of this is 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.

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: Using dental practice valuation 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 total invested capital, which includes practice total 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.

As is typical with professional practice appraisals, this value includes all tangible assets and practice goodwill. It does not include cash, accounts receivable, liabilities or real estate. The value of earnouts, 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.

This entry was posted on Wednesday, May 13th, 2009 at 10:21 am and is filed under Business Valuation Tips, Valuation in Your Industry. You can skip to the end and leave a comment.