So, you found a practice you like and it has a price tag of $500,000. How do you know the practice is valued correctly? A short answer is that the price, or value, is what a willing, knowledgeable and unpressured buyer along with a willing, knowledgeable and unpressured seller would be willing to exchange for a property or asset.
I can probably write a short, very boring book, on valuing a dental practice. But, no one would buy it and no one would read it. So, I'll keep this short and if you want more information, you can call or e-mail me.
A rule of thumb: value that is often quoted for the northwest is between 65% and 75% of the last 12 months collected production. If you're in a metropolitan area like downtown Seattle, Bellevue, Redmond, etc., it will be on the high end, possibly more. If you're in a rural area, you'll be on the low end and possibly less.
When I do a formal appraisal on a practice, I use standards approved by the Institute of Business Appraisers, of which, I am a member. These methods take into account not just the collections of the practice, but more importantly, the income of the practice. Why is this? Well, would you buy a $1 million practice with a net income of $100,000, or a $500,000 practice with a net income of $200,000? Don't answer out loud unless you're certain of the answer.
We, at Omni, use three methods - capitalization of earnings, asset value, and production acquisition that blend three areas of the practice - earnings, assets and production, to get a true value of the practice.
In summary, when you look at the price of a practice, you can start with a rule of thumb to get an idea of whether the practice is priced right. But, in the end, a full valuation is needed to determine the true value.
Regards,
Rod Johnston