How to value a dental practice

The economic repercussions of Covid19 will likely be felt for many years, and for many dentists this may prompt several key decisions around buying, or selling a practice. Naturally a key part of either process is how to value a dental practice. It should be a priority to establish and accurate dental practice valuation.

 There are several steps needed to accurately value a dental practice. Each of the stages we go through in a dental practice valuation revolve around information collection and analysis.

Initially it’s important to understand the driver for the valuation, perhaps a practice sale because you are downsizing to a smaller business, or retiring, or on the other hand hoping to buy your first practice, or progressing in your career and moving ‘up the ladder’. Other motivators may be to raise finance or for the introduction, or exit, of a partner in the practice. It’s also vital to understand the ownership structure from the outset. Naturally, the dental practice valuation process involves collecting data about practice performance, so it’s important to ensure permission is gained from all owners of the practice (and its data) before anything is accessed. 

As you begin collection, it can be quite a time-consuming process to gather the data. It needn’t be daunting if you are methodical about it, but trying to do so amidst the general activity of a working day will be difficult; we’d recommend setting time aside ‘out of hours’ to allow you to focus on this properly. 

Using Financial Data to Value a Dental Practice

The financial records of the dental practice are one important source of information, and in short, the more up to date and comprehensive the data, the better when it comes to deciding how to value a dental practice. The minimum should be three years of accounts, a single year may contain anomalies or ‘one-offs’, an extended period gives a much better trend of underlying performance. For example, in years to come looking back at 2020 it may well be an egregious year for many businesses, so looking at 2020 against, say 2018 and 2019 will give a better idea of how the business really fared. Remember also that even the most current set of accounts is likely to be ‘dated’ to some extent. HMRC rules require accounts to be submitted nine months after the end of the year to which they relate, so it’s entirely possible that you could be 9/12ths of the way through the next financial year before the previous year’s records are submitted. Therefore, indications of how the business is currently performing, for example the current year fee income, plan based income, the value of any NHS contracts and UDA numbers are all crucial in this respect.

Using Property Data to Value a Dental Practice

The nature of the property itself is also important, and the key point here is whether it is freehold or leasehold. Freehold is generally regarded as more secure, but you will need to demonstrate that if there is any loan secured on the property, that it can be paid from the business’ profits. Leasehold properties, in other words those on which a rent is paid, will also need to provide information on rental payments, the remaining life of the lease and when the next rent review is due. It’s also important to know if the lease is covered by the 1954 Landlord and Tenant Act as this will afford the tenant greater protection.

Data on the team should also be collected, as a minimum their contracted hours, salaries and tenures, and similarly for contracted staff (e.g. self-employed clinicians or hygienists) together with their rate (e.g. hourly, per patient etc..). Their tenure levels are also a good indicator of the culture of the practice; high turnover may indicate underlying problems as staff do not wish to stay at the practice long, lower turnover, on the other hand, suggest staff are happy there, conditions are good and will likely mean the business has greater stability and consistency.

Practice data is also needed as it shows the services provided, the normal opening hours, compliance certificates and any marketing activity undertaken. Alongside this will be the competitor analysis of the local area; even this may vary, a rural practice may need to look at other practices across a radius of several miles, in a more densely populated urban area this may only be a few hundred metres. You will need to see how many practices there are, and the nature of the work done (e.g. NHS, private or both).

Your Dental Practice valuation compared to other similar practices.

Having gathered all these key information points, we can then compare your practice to others that are similar. Naturally the more data points there are, and the more current they are, the easier it is for a valuer to arrive at an accurate figure.

At this point we revert to the original question around the driver for the dental practice valuation (for example, sale, to raise finance, to onboard/exit a partner). The next steps will depend on what the original motivation was. For example, if it was to arrange finance, then you should consider arranging a broker to secure finance, to onboard/exit a partner then a lawyer may need to be engaged. 

Whilst these steps may seem daunting, taken step by step, and supported along the way by the right level of professional expertise, it can easily be a smooth, successful and ultimately rewarding process to establish how to value a dental practice in a way that is accurate and realistic.