Nov 3, 2016
How Much is Your Dental Practice Worth?
Written By: Brian Hanks
When buying or selling a dental practice, one of the key elements of the deal is the ability to accurately answer the question – how much is your dental practice worth?
For buyers, specifically, the answer to this question is the second of the three big questions we help them answer when buying a dental practice:
- Is this a good practice to buy?
- If yes, what price is fair to pay?
- If I pay that much, how much should I expect to make?
As a seller, the selling price of the practice can feel like the culmination of a career’s worth of effort growing and developing a dental business.
When I help buyers consider the price of a practice, I remind them of a key fact: you don’t want to overpay for a practice, BUT wealth in dentistry does not come from buying and selling dental practices. The true value of a dental practice is the ownership of a stream of income – hopefully for a period of decades.
Still, as the buyer, you want to feel like you’re not getting ripped off.
Analyzing Dental Practice Values
We’ve analyzed the data of the fifty+ transitions we’ve been involved with at Practice Financial Group recently and compared it to public data provided by Jonathan Martin, CPA in the McGill Hill Group Newsletter. Full disclosure: Jonathan and the folks at McGill hill did the heavy lifting here, and we supplemented with our own data. Their original article is definitely worth a look. The total number of transitions analyzed is 816 over the last 15-year period beginning January 1, 2003.
Average fair market value to collections looks at the sales price relative to the amount of annual revenue, usually over the last 1-3 years. For example, if an oral surgery practice is collecting $1,000,000 sold for an average of 68.57%, the sales price would be $685,700.
In our example, that $685,700 would be split between goodwill and tangible assets. 74.41% of the sales price would be allocated to goodwill with the remaining 25.59% allocated to the tangible assets of the practice – equipment, supplies, etc.
The most valuable type of dental practice continues to be orthodontics at 79.81% of collections. Pediatric dental practices are the next most valuable, currently selling for an average of 71.22% of annual collections, followed by general dentistry at 69.87% Next is oral surgery at 68.57%. Endodontics practices are slightly lower at 67.61% and periodontics practices command the lowest prices at 65.62%. It’s important to note that prosthodontics practices are on the lower end of the spectrum at 67.13%, but the volume is low enough not to cross the line of a statistically significant sample size. The “true” average value could be lower or higher and without more data, we don’t know for sure which is the case. If I’m buying or selling a prosthodontics practice, I would note that average practice values are on the lower end, but more likely reflect the average overall dental transitions market.
It’s important to remember that fair market value to collections, while the most common valuation method, is not the only method to value a practice. For example, if two orthodontic practices, both collecting exactly $1,000,000 a year in collections, have different overhead – one at 50% and one at 60% – the better run practice, with 50% overhead should command a premium and sell for a higher price if all other things are equal.
Why Goodwill is Important to Monitor
We’ve discussed in another post (Negotiate Asset Allocation when Buying a Dental Practice) about the sales price of a dental practice being split into different asset classes. Goodwill includes not only the amounts allocated to “goodwill” on the tax returns but also the other intangible assets allocated during a practice transition. This includes patient files, covenants not to compete, etc. Why is this important? Because the seller will typically pay long-term capital gains rates on Goodwill, which run about 20% lower than ordinary income tax rates that are typically applied to tangible assets.
The higher the allocation to goodwill, generally the better for the seller. This is because goodwill in a typical dental transition is taxed at long-term capital gains rates (0-20%) instead of ordinary income rates (10-39.6%).
Endodontics practices command the highest goodwill premium at 82.18% ahead of pediatric practices which price goodwill at 81.05%, interestingly. Periodontics practices have average goodwill at 77.63% and general practices allocate on average 76.10% to goodwill. . Oral surgery, orthodontics, and prosthodontics practices all typically allocate around between 67-75% of collections to goodwill, give or take.
Why Prices are Rising
In general, we see practice values going up across the country. Several factors contribute to the rising prices. The most fundamental is the basic market dynamic of supply and demand. Dentists are working longer with the average retiring age closer to 70 than 65 (because they want to or they didn’t have good financial advice along the way)! Fewer retiring dentists means a lower supply of established practices for sale which increases practice purchase prices.
Another key factor is a sizeable rise in the number of corporate buyers in the market. Profit margins are so high in dentistry relative to other industries, that venture capital and private equity funds are looking to get in on the action, bringing even more demand for the fewer dental practices for sale!
Newer dentists looking to buy are facing the double-whammy of fewer dental practices generally available and more buyers looking to buy them. When they find a practice for sale, it is probably selling for more than it would have sold for a few years ago.
The Good News About Dental Practice Values
While the trends in dental practice values are going up, without question buyers should continue to look at purchasing a practice as a solid career strategy. Again, while no one wants to “overpay” for their dental practice, the clear fact is that ownership of the income stream of a dental practice continues to be the most financially lucrative career choice in dentistry.
Another key fact in the buyers corner is that bank lending is readily available today. More and more banks understand dental transitions and are getting in the game. All the reputable dental lenders will fund 100% of the purchase price on a profitable dental practice with some basic caveats. Many lenders will lend more than 100% when a working capital loan is included in the picture.
While important to understand the trends, dental practices continue to be valuable for both buyers and sellers. Current practice owners: you can rest a little better at night knowing that the market is valuing your business a little higher than it did in the past. You can also feel good that if you were to sell today, your practice would be on the market for less time than in the past.
Buyers considering purchasing a practice: know that you’re going to pay a little bit more for your practice than you would have a few years ago. But the income stream produced from ownership of a good practice is still worth every penny you’ll pay. With more buyers in the marketplace, it’s more important than ever to work with a reputable attorney and accountant that specializes in dental transitions to help you move quickly through the process.
Interesting to see the data of how much your dental practice may be worth? Send this blog post to a friend! Have a question about the value of a dental practice? Reach out directly to me firstname.lastname@example.org with questions anytime!
Read the articles below about buying and selling dental practices – they’ll help you avoid overpaying!