How are dental practices valued?

One of the first steps taken when preparing to sell a dental practice is to seek a professional valuation. This might seem daunting and confusing for some, so it’s important to have an understanding of what to expect as you enter this stage, as it will allow you to understand the true value of your practice, the type of buyer you might attract, and give you a clearer idea of what to expect from a sale. Additionally, it can allow you to take time to enhance the value of your practice prior to sale, making you better prepared to make your exit at the right time for you.

As mentioned, practice valuations may seem complicated. To ensure a smooth transition, with the buyer able to secure correct funding from the bank, and avoid last minute negotiations, it’s helpful for the vendor to have at least a basic understanding of how their practice value was calculated.

How’s it calculated?

A number of figures are required for the valuer to measure the value of the dental practice: annual turnover, NHS contract value, UDA value, associate fees, staff wages, rent, materials costs, and lab bills.

From here, the EBITDA can be calculated. Broken down, this means:

Earnings: the net profit, i.e., the total revenue generated minus total deductions
Before: the items below should be added back to the earnings, changing profit and assets in your favour
Interest: the interest charged on loans/debt added back to earnings
Taxes: the taxes, which invariably change from one period to another, are added back to earnings, as they are affected by numerous conditions which may not relate to business’ operations
Depreciation: tangible business assets fall in value over time, but EBITDA adds this value back to the total
Amortisation: the value of intangible assets[i]

The resulting calculation should be a true representation of the practice’s operating performance and profitability. It also removes costs specific to you that will not be incurred by a buyer. Once calculated, the EBITDA is multiplied by a factor determined by the market at the time. This will provide an initial valuation.

Maximising value prior to sale

It’s important to remember that your first valuation doesn’t have to be final. It’s recommended to start the process early, before you actually intend to exit, allowing you the time you need to make adjustments and enhance the value of the practice. By building this time into your sale plan, you can spend this time growing your business, and using your valuation as an indicator of potential areas for improvement.

Whilst some areas will be more challenging to improve than others – for example, it can be near-impossible to increase UDA value – there may be ways to improve turnover by increasing patient footfall and treatment acceptance, or expanding private treatment offerings. In doing so, even a small increase in turnover would have a big impact on the resulting valuation.

On the other hand, streamlining workflows to eliminate inefficient aspects and therefore minimise running costs can help boost practice revenue. This might mean improving stock processes to minimise waste, and ensuring the practice works with high-quality dental technicians who offer a fair price – managing lab fees.

The highly experienced team at Dental Elite are best placed to support practice owners considering a practice sale. You can book a free, no obligation practice valuation, in which the team will crunch the numbers and conduct a fact-finding mission using the most up to date figures to recommend specific things to help you enhance your practice value as you prepare to sell. The annual Goodwill Report, produced by Dental Elite, is also an excellent resource – providing a snapshot of the market and giving you an indication of the most up to date EBITDA multiples.

Don’t fail to plan

It’s recommended to carry out a practice valuation at least a couple of years before you anticipate selling. This will give you ample time to adjust your processes and increase your revenue. Whilst fluctuations in the market will, of course, always have an impact on businesses, preparing sooner rather than later helps to mitigate these potential changes – especially when supported by industry experts.