The Science and Art Behind Dental Practice Valuations

Dental practice valuations are often shrouded in mystery but they needn’t be; here we give you an insight into the process behind the numbers.

When the time comes to sell your dental practice, one of the first steps is to seek a professional valuation. It can help to determine the type of buyer you might be looking for and give you an idea of what you could gain from the sale.

Like many aspects involved with a practice sale, valuations can be quite complicated. It is also important to justify the final figure produced, as this will help a potential buyer to secure the required amount of funding from the bank and encourage a smooth transaction without late negotiations. It is therefore beneficial for the vendor to have at least a basic understanding of how their valuation has been reached.

The Calculation

In order to measure the value of a dental practice, valuers require several numbers associated with the business. These include annual turnover, NHS contract value, UDA value, average associate fees and other costs like staff, rent, materials and lab bills. From here, the EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) is calculated. In essence, this is the true operating performance and profitability of the practice whereby all non-cash costs are removed from the accounts, including any capital investments and expenses. It also removes any costs that will not be incurred by a new practice owner, such as a spouse’s salary.

The EBITDA value is then multiplied by a factor determined by the the market at the time to provide an initial valuation. However, this doesn’t always provide a viable investment on an associate-led model. Instead, the total adjusted income for a full-time principal is recorded and an adjusted EBITDA multiple used on this figure instead.

Take X Dental Practice as an example. For this, we have used the average EBITDA multiple from the most recent Dental Elite Goodwill Survey of 9.64 and the average adjusted net profit / fair maintainable trade multiple of 4.20.

 

X Dental Practice Scenario 1 Scenario 2
Turnover £500,000 £500,000
FPI £100,000 £100,000
NHS Contract £400,000 £400,000
(UDAs) 16,000 16,000
UDA value £25 £25
Less;
Associate fees £250,000 £137,500
Staffing costs £70,000 £70,000
Rent £30,000 £30,000
Materials and labs £70,000 £70,000
Other costs £40,000 £40,000
EBITDA £40,000 £40,000
Clinical Profit £112,500
Adjusted Net Profit (FMT) £152,500
Multiple 9.64 4.20
Value £385,600 £640,500

As you can see, taking the set-up of the practice into account makes a massive difference to its valuation. In scenario 2, 7,000 UDAs and £50,000 of the private gross is performed by an incumbent purchaser, so only the remaining 9,000 UDAs are delivered by associates, bringing their fees down. This has a significant impact on the profitability of the practice. If the UDA rates were higher but the NHS contract value the same in scenario 1, the associate fees would be much lower and could therefore make this a viable investment even through an associate-led model.

Enhancing Value

It is always advisable to start down the road to selling well before you actually intend to make the change. There are many different facets involved and much preparation to be considered, including the valuation. Where time allows, this can be the ideal first step towards readying your business for sale and it can indicate potential areas for improvement in the proceeding months or even years.

Of course, increasing UDA value is very rarely, if ever, a possibility. However, there are other areas that will make a difference to the value of a practice. For example, you could look to increase your turnover by bringing in more patients, improving treatment acceptance rates or growing the private services on offer. Even a small rise in turnover would have a significant impact on EBITDA and the resulting valuation.

Another way to help boost the value of a practice is to minimise running costs and outgoings wherever possible. This is not about cutting corners, but rather about eliminating inefficiencies. It might involve bulk buying routine products or improving stock control so as to avoid waste. It may incorporate reducing bills for electricity and gas, helping to minimise the business’ carbon footprint at the same. Lab fees come under this umbrella as well, so ensuring that the practice works with high-quality, fairly-priced dental technicians is also important.

If you’re thinking about selling your dental practice in the next 2-4 years, it wouldn’t hurt to start preparing sooner rather than later. The expert team at Dental Elite offer free, no-obligation practice valuations and they can recommend specific things to help you maximise your business and get the very most from your sale. They will also provide a full justification of their calculations to support the suggested asking price.

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