Two most commonly used methods:
- Income Approach The primary way to value by looking at Income and Cash Flow
- Market Approach This is what practices are selling for in a respective market.
Income Approach : As Mr. Wonderful on Shark Tank , would say, “ It’s ALL ABOUT CASH FLOW” Cashflow is the primary determining factor of how much a purchaser can afford to pay and at the end of the day earn a salary commensurate for the work they did along with a profit component of the business.
The salary comes from the dentist’s direct production by their own hands. This salary component should be no less than 30%. The profit component is derived from the production of others , ie. hygienists, and or associates . Keep in mind that it is the collected production after any insurance adjustments.
Lenders MUST be able to prove CASH FLOW is SUFFICIENT to pay practice overhead, service the debt, and provide adequate net income to the buyer.
Brokers and appraisers MUST consider the ability of the cash flow to support the Market approach.
Other Considerations Affecting Practice Value:
- PPO Participation. These reduced reimbursements negatively impact practice profit and the resulting value
- Fees
- Procedure Mix
- Hygiene Revenue : The CORNERSTONE of a solid practice
- Tenure of staff
- Practice Reputation
- Facility
- Equipment
- Location
- Active Patients: Those patients seen in the past 18 months.
- New Patients
- Growth Trend UP or DOWN
Please read THIS White paper titled “Practice Value” written by my good friend and mentor, the godfather of Dental practice valuation and founder of American Dental Sales and CEO of American Dental Sales South Dr. Earl M. Douglas.