Conducting a thorough business valuation or appraisal before listing a dental business for sale is an essential first step for several reasons.
Assessing the value of a practice is a crucial aspect in transitions or financial planning within the industry. However, the true significance lies in dissecting the valuation results to address the opportunities and threats it reveals. Practice valuation advisors play a pivotal role in recognizing and tackling these aspects effectively.
Non-financial factors play a significant role in influencing a practice’s value. Variables such as location, patient demographics, practice model (insurance-based or fee-for-service), staffing structure, quality, and the stage of the practice’s life cycle can all impact its worth. Additionally, future earnings potential and impending changes within the practice must be taken into consideration, as relying solely on past performance may not paint an accurate picture. A thorough review of these non-financial factors by knowledgeable practice valuation advisors is essential in the valuation process, as numerical data alone may not provide a complete understanding.
Valuation calculations typically involve employing various methodologies, which are then averaged to derive a final estimate. These methods, including Capitalized Excess Earnings, Asset Value, Annual Net Receipts, and Average Annual Earnings, utilize historical financial data to determine value. However, it is imperative to have advisors who can analyze both financial and non-financial data, along with underlying practice metrics, to assess the potential for improvement or sustainability. For instance, unique patient demographics or reliance on specialized dentistry may present challenges for a new owner if not adequately addressed beforehand. Likewise, identifying opportunities such as unaccepted treatment plans can significantly impact revenue under new management. These complexities underscore the importance of viewing valuation as a starting point, with further analysis conducted by practice valuation advisors to ensure informed decision-making.
EBITDA multiples vary from market to market. For instance, a practice listed in rural Kansas may receive a lower multiple of EBITDA offer than a practice listed in a fast growing, larger market like Austin. Because there is no “MLS”-like database where all private transactions are recorded, industry experts can only make educated guesses as to what EBITDA multiple your practice sale can command.
Ratio of Collections also varies from transaction to transaction. A buyer may consider a multitude of factors – described above – and land at an offer that they deem reasonable and fair. Generally, a seller can expect to receive between 70% and 90% of trailing twelve months or prior year collections from an independent buyer or small and medium sized group practice DSO.
At the end of the day, your practice is worth what someone is willing to pay. Brokerages and expansive marketing platforms like the Dental Deal Report will ensure that your listing receives the highest number of qualified offers and competition amongst potential buyers.
Consider creating a digital storage file for these documents that can easily be shared with both a practice valuation consultant and buyers, alike. Some digital file storage solutions include Microsoft OneDrive, Box, DropBox, and Google Drive, among others.
In terms of process, a practice transition typically takes the following pathway:
LOIs include an outline of the Intended Close Date, Equity Valuation, and the Purchase Price. This document is not legally binding, but provides a level of understanding between the buyer and seller as they navigate the transition stages. It is typical for a seller to collect multiple LOIs as they consider the qualifications and “fit” of potential buyers.
Legal Document outlining the transaction of the asset(s) (i.e., equity of the business entity, equipment, supplies, materials, patients, staff, etc.)
A new Lease Agreement or Assignment of Existing Lease is created and signed with the New Business Entity (LLC / S-Corp / LLP / etc.) of the selected Buyer.
New Employment Agreement(s) with existing doctors (i.e., if Seller wants to stay on as an associate dentist, or if any existing providers will remain as employees of the new Owner, etc.)
The final stage of the transaction is the wiring of funds from the buyer to the seller.
