What You Need to Know About Valuing Your Practice

Many dentists who are considering selling their practice think that they can handle the valuation process themselves. They may have managed a large transaction successfully—the sale of a house, for instance—and assume that the process is similar. But selling a practice is far more complicated than selling a house.

To maximize profit, you must be familiar with the valuation methods used, understand how your objectives (immediate retirement or not) affect the transaction, and recognize the imperative need for specialized accountants and brokers. Overlooking any of these factors or being unaware of available strategies can cost you money. Here’s what every dentist should know about valuing a practice.

• Buyers: Are you selling to an individual or a group that intends to practice dentistry and will require financing or to a DSO that is looking to invest and has access to private equity funding? The answer has implications for the type of valuation metrics that would be most advantageous for you.
  
  EBITDA vs SDE: A practice may be valued using earnings before interest, taxes, depreciation, and amortization (EBITDA) or seller’s discretionary earnings (SDE). The best method in any given situation depends on the type of buyer involved and on the seller’s short- and long-term goals. Investors looking to make an acquisition are interested in the operating profitability of the business, which is what EBITDA describes and what DSOs use to evaluate a practice.
  
  On the other hand, an individual or group looking to practice wants to know what the owner’s take-home pay is, including salary, net income, tax treatment advantages, and personal expenses charged to the practice. That’s what SDE describes. An SDE valuation makes more sense when buyers are owner-operators and need financing.
  
• Professional advice: Given the complexity of assessing the market value of a dental practice, it is in the owner’s best interest to consult experts who understand all of the factors involved. A team that specializes in dental practice transitions can apprise you of your options and help you choose the right ones based on your goals.
  
  Many dentists use the services of a certified public accountant (CPA) to determine the value of their practice, but CPAs don’t necessarily have expertise in all available options. In many cases, CPAs provide SDE calculations that are incorrectly classified as EBITDA. That can put you at a disadvantage if you’re considering an offer from a DSO.
  
  It’s a good idea to work with brokers experienced in various types of dental practice transitions. They can tell you which buyers (individuals, groups, DSOs) are likely to be interested in your practice, what valuation method is best in your case, and how your post-transition options (continuing to practice or hanging up your coat) affect the sale.
  

The bottom line? Selling your practice is probably the largest financial transaction you’ll ever make. In addition to getting the most out of the business you’ve built, with a professional on your side you’ll get advice on the strategy that will best help you achieve your objectives. If you go it alone or work with someone who doesn’t have the breadth of knowledge you need, you’re less likely to realize the maximum profit.

Start by understanding the factors at play and make sure you obtain professional advice. Even if selling isn’t on your radar, get an appraisal from a broker who specializes in dental practices. They can tell you what aspects of the practice, if any, can be improved to increase its value. Once you know how much your practice is worth and the long- and short-term factors that would affect its sale, you’ll be able to make an informed decision about your exit strategy and the timing of your sale.