Dental Practice Valuation Insights
It seems that every time I value a dental practice the industry has undergone or is going through significant changes. Patients and the medical community are rapidly recognizing dentists as oral health specialists which is expanding the services being offered by the dental industry. The dental professional is looking beyond the mouth. Connections between oral health and whole body health are allowing for more collaboration around sleep problems, oral cancer, facial esthetics, and periodontal health. This trend combined with increased patient education and demand is driving growth in dental consumables, equipment, and technology. Finally, young professionals buying and transforming existing practices, as well as, merger and acquisition activity continues to grow as small startup dental support organizations (DSOs) empower value driven entrepreneurs.
The National Association of Certified Valuators and Analysts March/April 2016 issue of The Value Examiner includes a three-page article entitled Valuation Insights in the Dental Industry by Maria G. Melone, CPA, CVA. Ms. Melone spent ten years working at one of the largest DSOs handling all aspects of the buy-side of dental transactions and she has helped facilitate hundreds of transactions. She offers many valuable insights including:
- Most sellers do not know the value of their dental practices, and as a result, rely on a broker to provide an opinion of value.
- Many people in the dental industry refer to the value of a practice in terms of its percentage of last year’s collections.
- With the influx of private equity money in the industry it is becoming more common to use a multiple of EBITDA (Earnings Before Interest Taxes Depreciation and Amortization).
- As it relates to dental practices, the Income Approach is the most relevant and effective method of valuation. For a majority of dental practices, the significant value lies in future earning potential and the transfer of the patient base (an intangible asset) from the seller to the buyer.
Finally, many buyers, sellers, and brokers focus on production but in today’s third-party payer systems production and collection may be very different. Comparing collection to production provides an initial and meaningful way to measure the operating efficiency of a practice. Generally speaking, a more efficient practice is a more valuable practice. The creation of DSOs is allowing dentists to maximize their practice value with the support of professional office management. The DSO model enables dentists to focus on the patient while maximizing operational efficiency.
If you are buying, selling, or need help valuing a medical practice in the dental industry please contact Kenny Pierce, MBA, CVA, MAFF at 916-724-1675 or email@example.com.