Your dental practice is more than a business – it’s a valuable, evolving asset that you’ve worked hard to build. But do you know its true worth in today’s market?
A professional valuation provides a comprehensive, data-driven analysis of your practice’s financial health, strengths, and opportunities for growth. Whether you’re looking to optimize operations, plan for future investments, or prepare for a transition, a valuation can help you make more informed decisions about your practice’s future.
What is a Dental Practice Valuation?
A dental practice valuation is a comprehensive assessment that determines the financial worth of a practice in the current market. It’s a strategic tool that goes beyond a simple review of financial statements.
While an accountant provides essential financial reporting, a specialized dental practice valuation requires industry-specific knowledge, taking into account factors like patient flow, clinical production, technology, and local market conditions.
A valuation considers a wide range of factors, including:
- The practice’s physical location.
- Equipment and technology.
- Area demographics.
- Overall patient base and list of procedures.
When is the Right Time to Get a Valuation?
A valuation is not just for when you’re ready to sell. Regular valuations are crucial for keeping your practice on track and ensuring it thrives over the years. Tier Three recommends getting a full practice valuation at key milestones in your career.
Important times to get a valuation include:
- Selling or Buying a Practice: A third-party valuation helps a seller or buyer secure a fair price. It can also provide insight into areas that can be improved to increase future value, whether the intent is to sell immediately or 10 years down the road.
- Merging or Acquiring Another Practice: A valuation helps ensure a merger or acquisition is financially sound by closely examining the assets and operations of another practice.
- Estate Planning: A valuation can help owners determine the worth of a practice and set up a proper transition plan in the event of an untimely illness or death.
- Partnership Buy-in or Buy-out: A valuation provides a clear picture of the practice’s financial and operational health, which sets the stage for a partnership buy-in or buy-out.
- Financing and Financial Restructuring: Whether you need to borrow against your equity, a buyer needs financing, or your accountant needs a value for tax restructuring, a valuation provides an objective, third-party perspective.
- Business and Growth Planning: Valuators can suggest specific strategies to enhance your practice’s value in a future sale.
It is recommended to get a full practice valuation every 2-3 years to track trends in revenue, patient growth, and operational efficiency. A valuation should also be completed within 12 months prior to a sale date so a purchaser can receive financing.
Key Factors That Determine the Value of a Dental Practice in Canada
A dental practice valuation goes beyond a simple revenue multiple. It assesses all aspects of the business to arrive at a true market value.
- Financial Performance: Valuators analyze revenue trends across services and providers over multiple years to assess stability and identify growth opportunities. They also examine the practice’s cost structure, pinpointing unnecessary expenses to provide a clearer financial picture. By looking at overhead expenses in relation to national averages, a valuator can identify areas where operational efficiency can be improved.
- Patient Base (The Tier Three Advantage): Your patients are your greatest asset, and understanding their impact is key to unlocking your practice’s full value. Tier Three’s exclusive Advanced Patient Metrics® methodology analyzes key patient trends to uncover hidden opportunities for growth.
- Active Patient Count: Most dentists can’t say how many active patients they’ve seen in the last 12 months, which directly impacts practice value. A healthy single-dentist general practice will usually have 1,500 to 1,800 patients coming at least once a year.
- New Patient Flow and Attrition: Examining trends in new patient flow can help enhance marketing strategies and improve patient retention. Analyzing patient loss patterns (attrition) identifies opportunities to boost retention and revenue.
- Hygiene Program Strength: A robust hygiene program indicates long-term stability and increases opportunities for dentistry.
- Tangible and Intangible Assets:
- Location and Facility: A valuation assesses your physical assets, including the facility and leaseholds.
- Equipment and Technology: Investing in up-to-date equipment and technology can increase productivity and elevate the quality of care for your patients.
The Valuation Process: What to Expect
The valuation process involves an expert analysis that goes beyond past performance. It starts with gathering the necessary information and culminates in a comprehensive report with strategic recommendations.
- Information Gathering: To prepare for a valuation, you will need to gather documents such as three years of financial data, including business tax returns and profit and loss statements. You will also need practice documents like lease agreements, recent equipment invoices, and staff contracts. Finally, most valuators require you to complete a detailed questionnaire about your patient base, team members, clinical facility, and more.
- Analysis and Methodology: With a clear historical picture, Tier Three uses a discounted cash flow method to forecast value, factoring in untapped potential in billings and costs. This results in an earnings-based appraisal that reflects the true potential of your practice.
- The Valuation Report: The final report is more than just a number – it’s a strategic tool. It includes a comprehensive assessment, data-driven insights, and strategic guidance to help you optimize operations and plan for the future.
How to Choose a Valuation Expert in Canada
Choosing the right expert is critical for an accurate and insightful valuation. You should seek guidance from professionals with deep insight into the Canadian dental industry.
When hiring a valuator, consider these factors:
- Look for Dental Industry Specialization: An expert should have years of experience in dental practice valuations and understand what truly impacts the value of a practice.
- Transparent Methodology: The valuator should be transparent about their methods for appraising dental practices.
- Local Experience: Ask how many appraisals the valuator has conducted in the specific area where your practice is located.
- Focus on Future Growth: A good valuator doesn’t just provide a number; they offer a comprehensive, actionable plan to help you navigate your practice’s future.
Using Your Valuation as a Strategic Tool for Growth
A valuation is not a final exam; it’s an annual physical for your business. A valuation report provides insight into areas to improve your business and enhance its financial worth.
Here are some strategies to consider after a valuation:
- Increase Revenue: Attract new patients, optimize your fee schedule, and expand your service offerings.
- Reduce Overhead: Improve cost management by reducing operating expenses that are out of line with national averages.
- Update Equipment and Technology: Investing in up-to-date equipment and technology can increase productivity and elevate the quality of care for your patients.
- Strategic Team Growth: Assess if bringing on associates or hygienists will help you reach your goals faster based on your valuation report’s findings.
