When is a Practice Valuation Not Really a Valuation?
A practice valuation is an essential step for buyers, sellers, and people forming a business partnership. Whether you bank financing or looking at merger options, this information is necessary to obtain when funding the deal.
When you obtain a practice valuation (also known as a practice appraisal), it’s a formal process to determine the business’s value. All relevant information is considered by an industry expert, including:
- Gross income
- Net income
- Number of patients
- New patients
- Patient retention
- Medical equipment ownership
- Fees and pricing structure
- Service offerings
- Insurance participation
- Local market issues
Anything that could impact the income or value of the practice must be included in the valuation. The final valuation can be provided in a written or oral format, but it is critical that it includes ALL relevant information. A partial valuation is inaccurate since essential details are not calculated into the totals.
Some consultants offer a “free valuation” or appraisal, but you need to understand that this free offering is different than an actual practice valuation. Most likely, these free services are an “opinion of value,” using the rule of thumb approach instead of looking at the full picture.
When an Opinion of Value is formed, this process uses the Rule of Thumb approach: the value is determined using an arbitrary multiplier. An example of a Rule of Thumb is assuming that a dental practice is worth 80% of gross revenue. While this Opinion of Value is a fast measurement of perceived value, it doesn’t provide an accurate representation of the real value of the business.
The general Rule of Thumb calculation falls short since it doesn’t account for the overhead costs of the practice. For example, if two dental offices collect the same amount of money annually, their value would be the same using the 80% of gross revenue calculation. But if one business has an overhead of 55% and the other business has an overhead of 70%, then the valuation of the first business is higher.
A formal practice valuation needs to be completed using all relevant information to understand the full price of the business.
Unfortunately, some providers will tell clients what they want just to close the deal. For example, it makes the broker look good to tell a potential client that the practice is worth $700,000, even though the broker knows that it will only sell for $500,000. If you are hiring a consultant, broker, or specialist, then it’s essential to make sure that you are doing a complete valuation analysis, so you understand the real market value of the business.
Looking for a transparent provider is a critical step in determining the actual value of your business. Your practice is one of the most valuable assets you have, which is why it’s worth the investment to have a full appraisal from an unbiased provider.
Do you need more information about the current value of your practice? Talk to our team at JRA. We provide full-service solutions to help dentists and doctors with the development of their practices. Contact us to discuss available services.