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General | 10.9.2014 | Comments Off

Would you like to know what your dental practice in the Mid Atlantic area is worth?  Keep reading to find out the three most important factors in determining the value of your dental practice!

 

The Three Most Important Factors

 

Having an idea of what your practice is worth can be very helpful in terms of planning for your retirement. Who doesn’t want to know how their retirement will be affected by their dental practice sale?

Brokers, dental attorneys, dental CPAs and other advisers in the dental transition field use several methods to determine the value of a dental practice. Some of the more common methods include capitalization of earnings, excess earnings and gross composite multiplier. While I understand these methods, I believe they are all subjective due to the different variables that are used in these methods. I won’t waste your time explaining these methods when I believe there are more accurate ways to determine the value of a dental practice.

The following are the three most important factors in determining the value of a dental practice in my opinion.

 

Factor #1- Total Cash Flow

If I had to pick one factor as the most important in determining the value of a dental practice, it would have to be the total cash flow. Sometimes dental brokers will refer to this as “adjusted net earnings”. When I say “total cash flow”, I am referring to everything an owner gets out of the dental practice after expenses are subtracted. Owner salary, owner retirement contributions, owner health insurance and other personal items bought through the practice are examples of items that would be considered part of the total cash flow.

Most dental practice sales are 100% financed by the banks and one of their biggest concerns is the cash flow of the practice. The higher the selling price, the larger the practice loan, but as long as there is still enough cash flow for the new owner after debt service, the selling price can be supported.

 

Factor #2- Is it a Sellers or a Buyer’s Market?

Just like a real estate market, selling prices are affected by supply and demand. Currently in Maryland and most of the Mid Atlantic area, we are in a seller’s market. The reason is simple: there are more buyers looking than there are practices for sale. This has caused selling prices to rise. At some point the tide will turn and there will be a glut of practices for sale and prices will come down relatively speaking.

 

Factor #3- The Practice Location

Is your practice in a rural, urban or suburban area? Is your practice in an area that is growing, depressed, saturated with dentists or popular to live near? Even though it is a seller’s market in areas like Maryland, Northern Virginia and D.C., if your practice is located in a less than desirable location it will affect the selling price of your practice in a negative fashion. Rural practices and urban practices in depressed areas are examples of typical areas that may lower the selling price of a dental practice.

So if you want to know what your practice is worth, look at your total cash flow, know your market and understand the desirability of your particular location.

 

Whether he is representing sellers or buyers in Maryland or other areas in the Mid Atlantic region, Dr. Tom Bonsack, president of MidAtlantic Dental Transitions, is very familiar with the three most important factors in determining the value of a dental practice.

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