Value of Your Practice: How it Will be Evaluated and Appraised
How much money is a buyer willing to pay to buy your practice? It doesn’t matter if it is an owner-operated or investor-owned business; a person is willing to take ownership if income is available after the expenses are paid. With an owner-operated dental practice, the “net income” of the practice is anything that is left after overhead and payroll is paid. This number is estimated for the first year after purchase, giving the purchaser the information needed to decide whether they would like to pursue the opportunity.
It is common for potential sellers to ask us to ballpark what their practice is worth. Even though it might seem like an easy estimation, there isn’t a reliable answer without thorough evaluation.
According to national figures, most practices sell between 50% to 90% or more of the latest year’s collections. But these numbers can be deceptive.
For example, if you look at two practices that are collecting the same amount in a given year. This “percentage of gross” calculation assumes that the same value is applied for both practices. But it doesn’t consider other important details. If one practice has a rent payment double the cost of rent for the other practice, then the practices are obviously not worth the same amount. The property with a lower rent payment would be worth more money due to higher net income for the owner.
Certain protocols and accepted standards need to be adhered to by the appraiser. Certain aesthetic features or equipment might not hold substantial value on their own, but the quality of these things can have an impact on the overall value of the practice.
In most situations, a practice owner feels like they are sitting on a “gold mine” opportunity in selling their practice. It is necessary to consider that the price of the sale could be obscured due to business practices or other details that affect profitability. The truth is that valuing “potential” is impossible.
Buyers invest in the practice to have the opportunity of reaching that potential. It’s not realistic to guess the value of the practice without applying a standard methodology that includes several strategies and multiple variables.
At JRA, we offer more than 30 years of experience in the commercial real estate industry. If you are looking to buy or sell your practice property, then we’re here to assist. Contact our team so that we can help you secure the best possible deal.