* This article was first printed in the April 2012 issue of the Midwestern Dentist, the publication of the Greater Kansas City Dental Society. I have edited it a bit for this column but the results are the same.

One of the most frequent calls we get at EMA is for the magic number of practice valuation that when added, subtracted, multiplied or divided to some critical practice statistic will allow the caller to proceed with their sale, divorce, partnership, etc. Whether they are dentists, accountants, attorneys, soon to be ex-spouses or bankers, they are usually somewhat disappointed to learn that regardless of what it says on page 29 of the ADA’s Valuing a Practice, a Guide for Dentists Handbook, there isn’t one answer that will apply to all situations. However, if you will indulge me a few contingencies and a little explanation, I think I can give you a few tips that may be useful in getting at least some idea about what your practice may be worth. If you are really patient and read through to the end, I’ll even give you the magic formula.

For the purpose of this article, we are going to disregard several valuation methods that are parts of a complete and thorough Appraisal. Among others, that would include the Summation of Assets, Capitalization of Earnings, Present Value of Discounted Future Earnings methods along with the Goodwill Registry information. I hope though that enough information will be given that you will be able to expose some bogus valuation method presented by someone who has never sold someone else’s dental practice. I’m going to focus primarily on Midwestern market data and what is known as a “Rule of Thumb”. Please make note that Midwest data is different from East and West Coast data and you should be very careful not to let that information confuse the issue.

Let me state categorically that a Rule of Thumb is NOT a valuation method and although it can be helpful, it should never be the way that your practice is valued. We like to play a little game when we are speaking to a classroom of dental students in which we create our own “Vertical Dimension Rule of Thumb.” Choosing volunteers, we build a database of information that gives us an average height. How silly does it sound though to declare that, given the data points we have gathered, there is any one number that accurately represents the height of all dental students in that class? In fact, the number proves to be correct for only about 3% of the class. Would you agree that using a method that is wrong 97% of the time is not how you would want to assign a value to anything, especially something as precious as your dental practice?

So is there any value to this method? I believe there is. Since the number in our exercise was established from a population of typical students, it would be easy to recognize any outliers to the norm. If dental students typically range from 60 to 76 inches tall and the median is 68 inches, we know a student who is 84 inches tall would be very unusual. Given the confines of a dental operatory, one would have to wonder whether or not dentistry would be a very good career choice for that individual. By the same token, if you have a little information about the market for dental practices in your area, would you not easily recognize when someone has used the “how much do I need for a new Cessna “ method to determine the asking price for their practice?

I believe it is fair to say that every dental office is unique. Whether it is location, revenue, profitability, curb appeal, staff experience or patient mix, every practice seems to be a little different. As a result of our activity in this market though, we have accumulated over 200 Comparable Sales data points that allow us to have a fair idea about how similar (but admittedly not exactly alike) practices might be valued. Recognizing an outlier means that someone “has some explaining to do”. Maybe it’s really worth it but further study would be needed.

I’m getting ready to tell you the top secret information but you have to promise to read all the way to the end because some of the disclaimers may prove to be very important to you. Ready? Here goes:

“General Dental Practices in this market typically sell for somewhere between 50% and 70% of the average of the last three year’s gross revenues with “what have you done for me lately” being the most important, especially if it is down.”

Those words were carefully chosen. If you think your practice is going to be close to the 70% side of the line, you’re probably wrong. If you are in a rural area and think you will be lucky to get 50%, you’re probably right. The price may be significantly influenced by any urgency to buy or sell. You cannot usually have a fire sale at top dollar. If you think the ratio is linear for all practice sizes, you are probably wrong and if you think profitability may be more important than total revenues, you’re probably right. There is a low end threshold of revenue that is marketable and there are very profitable practices that will never be sold. There are buyer demographics that work for you and against you. Fractional interests in larger practices may not have the percentage of value you might expect. Lenders are not comfortable with practices that have steadily declining revenues, regardless of their current revenue, and that will have a tremendous impact on your practice value.

The obvious fact is that if you have a practice with gross revenues (collections) of $600,000, the difference in value within our calculated range can be a six figured number. You need to be careful and objective about your practice and how it fits into the market. We feel so strongly enough about this that we insist on a full appraisal for all prospective listings. That process is not “free” but is credited to you in full at closing. Access to information has made buyer prospects much savvier, and you should take steps to be prepared for when the time comes to transition your life’s work.

Dr. Steve Wolff

UMKC Class of ‘77