By Greg Auerbach, MBA

The value of a business is determined by the amount of money a buyer would pay to acquire the opportunity to earn an income. Whether an investor-owned or an owner-operated business, the amount of money left after all expenses are paid is the incentive to take on the risk of becoming an owner. For an owner-operated dental practice, the money left over after the overhead expenses are paid is the practice “net income”. By estimating this figure for the first year of operation, the purchaser is able to make an informed decision as to whether the opportunity is worth paying for or not.

Invariably when speaking with a doctor who is contemplating the sale of his or her practice, the question comes up, “so, ballpark, what do you think my practice is worth?” While this may seem like an easy estimation to make, without proper evaluation, there really is no reliable way to answer this question.

While it is true nationally that fee-for-service general practices sell on average for anywhere between fifty-five (55%) to seventy (70%) percent of the most recent year’s gross production, within Florida, the range may be skewed a bit higher for a similar practice in a desirable urban/metro area. Even so, depending on these figures can be extremely deceptive without a full analysis.

For example, assume the evaluation of two equivalent practices, each producing the same amount in gross collections. By applying a formula based on a percentage of gross production, both practices would be valued the same. Looking deeper, if one practice has a rent of that is half as much as the other practice, would both practices be worth the same to a purchaser? Assuming that every other piece of the two practices was exactly the same, the obvious answer would have to be “no”. Since the rent is not the same, with all other expenses held constant, the practice with the lower rent would be worth more since it results in more net income for the owner.

When asked to evaluate a practice, an appraiser should adhere to standard, accepted procedures for business appraisals. There is specific methodology that goes into the evaluation of a business. Included in this is the importance of maintaining and continuously keeping up on the best practices of practice evaluation. In addition, it is important that the evaluator have a good understanding of the local market and even the specific practice. While equipment or aesthetics may not have a significant value on their own, the quality of both may be extremely important in the determination of the overall practice value.

In most cases, the seller of a practice feels that their opportunity is a veritable “gold mine”. In many cases, the doctor does not do (fill in list of procedures here) and an aggressive purchaser who wants to do more business only needs to advertise, join insurance plans, or change something else about the practice. Now, while this may be interesting to a purchaser and a great opportunity for their future, if the seller has not taken those measures, the outstanding question is whether the “gold mine” is a reality. The bottom line, though, is that it is impossible to value “potential”. A purchaser only purchases the opportunity to reach that potential.

Ultimately, value is an opinion either backed up by guesses or facts. Informal polls of colleagues or classmates, public or internet forums or simple formulaic calculations are guesses. Standard methodology taking into account multiple variables and cross examined through several methods is the only way to produce a reliable valuation.