Multiple Methods Capture Multiple Aspects Of Your Practice’s Value
We constantly receive calls from potential sellers and buyers asking what practices, in general, are worth. Almost always callers want a simplified answer such as the percentage of collections that practices sell for. We can give them a simple answer based on our standard deviation analysis of databases that contain information on practice sales and practice appraisal results. We tell them that 75% of practices sell for more than 55% and less than 73% of their annual collections. That’s a wide range, representing for example, a $126,000 range of value variance for practices collecting $700,000 per year. For each individual practice, there are specific characteristics and attributes that push its individual values up and down within this range and that in 25% of cases push values out of this range. “On top of this, in some geographic areas this 55% top 73% range moves upwards significantly and in some geographic areas this range is less”
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Any attempt at a simplified answer is no more than a rule of thumb. When establishing an asking price from a seller’s perspective, the use of a rule of thumb leaves open the risk that the seller’s practice is undervalued and that the seller does not receive full fair market value from his/her sale. From the buyer’s perspective, the risk is that a rule of thumb over-values any one specific practice.
Buyers and their advisors typically put no faith in asking prices that are based on no more than rules of thumb. Without a comprehensive appraisal, there is nothing to serve as logical support to the asking price during negotiations. The true value of the practice is not documented. Negotiations are difficult. Negotiations may break down, or they may result in a sale price that is grossly unfair to one party or the other.
No Single Appraisal Methodology Is Adequate
No single appraisal method captures all aspects of a specific practice’s value. The use of only one appraisal method risks that some major factor in a practice’s value is not given adequate consideration. Multiple appraisal methods are necessary. From the results of several different appraisal methods, the experienced practice appraiser must then determine the final value, giving consideration to the weight that should be given to each method’s result.
The appraisal methods that we use for anyone specific practice may need to vary, based on the characteristics of the specific practice and the range of practice data and information that is available to us. But, in most cases, given adequate data, to give adequate consideration to multiple components of a practice’s value, we will use at least 3 of and often all 4 of the following appraisal methods:
1. Single Period Capitalization of Earnings
A capitalization rate, derived from market data, is used to determine the value of the practice based on the total of all dentists’ earnings derived from the practice.
2. Asset Summation – With the Goodwill Component Revenue Based
The theory is that the whole is worth the sum of the values of its parts. This method determines the value of the goodwill component of the practice based on comparative market data that correlates the value of goodwill to the annual collections of dental practices. The value of other assets are then determined by various methods and added to the goodwill value to determine total practice value.
3. Asset Summation – With Goodwill Component Earnings Based
Again, the theory is that the whole is worth the sum of the values of its parts. This method determines the value of the goodwill component of the practice based on comparative market data, as in the previous method, but in this case, it does so with market data that correlates the value of goodwill to the annual earnings of dental practices. As in the previous method, the values of the other assets are then added to the goodwill value to determine total practice value.
4. Market Transactional Data
There is significant data available from which to determine a price to collections and price to earnings ratios known as multipliers that allow the determination of the value of one practice by comparable means to prices paid for other practices. Of the market methods, comparing earnings multipliers versus revenue multipliers, based on R squared statistical analysis revenue multipliers are more statistically accurate and/or predictive of the prices of practices in the dental practice market. Therefore, revenue multipliers are used in this method, as opposed to earnings multipliers.
5. Purchase Debt Serviceable By Excess Income
Although a bit too complex to explain in detail in this limited space. it may suffice for purposes here that the appropriate valve for the practice is determined by calculating the sale price at which there is appropriate balance among:
(i) Pre-tax cashflow potential of the practice;
(II) annual principle and interest payments for the buyer’s loan; and,
(iii) useable income for the buyer
When all 5 of the above methods are used in conjunction, Method 1 considers earnings, Method 4 considers collections, Method 2 considers both collections and the value of tangible assets such as dental equipment and computers, etc., and Method 3 considers both earnings and the value of tangible assets. Methed 5 considers the financial feasibility of a purchase of the practice of a determined price.
Sources Of Practice Sale Data
In regards to the appraisal process, we’re often asked what sources of practice sale data we utilize. The data that we utilize in each appraisal project comes from one or more of the following databases.
1. Goodwill Registry
In addition to being a source of information on transactions in other healthcare fields, it provides a dental practice sale and valuation result database maintained by and available from The Health Care Group, Inc., 140 West Germantown Pike, Suite 200, Plymouth Meeting, PA 19462-1421. It contains sale and valuation related data on a large number of dental practice sales and valuation reports that are useful in establishing the fair market value of a specific practice. Information in the Goodwill Registry database related to dentistry has been collected from dentists, CPAs, practice brokers, and other sources over a period of many years. It reports certain basic financial data for each dental practice reported along with the sales price or valuation result organized by dental practice specialty and general dentistry. Date of the sale, purpose of valuation, state of location, component of goodwill value, and other distinguishing characteristics are reported for each entry. Data maintained in the Goodwill Registry typically dates back 10 years.
2. George D. Stollings and Associates Inc’s Proprietary Practice Sale & Valuation Database
Within our office, we have maintained records on dental practice sales of our clients in the most 10+ recent years. In almost all cases our records for each sale include an array of valuable information such as the sale price, the practice’s annual collections, the practices taxable income, copies of tax returns, and information on the style of practice, location of the practice, etc.
Data from the above sources are compiled and statistically analyzed by George D. Stollings and Associates, Inc.
* The term “Appraisal” is commonly used to describe the process by which a practice’s value is determined. We commonly use this term because our selling clients are familiar with this term. However, the term “Valuation” is more correct.