The Market Approach simply compares your dental practice price with other nearby dental practice sales that recently sold. The theory behind this method is that a ready, willing, and able buyer paid a seller a certain amount of money for a practice and neither party was under duress.

Major Market Factors:

(1) AREA DESIRABILITY: Macro-geographic areas (small town vs. metropolitan areas) and micro-geographic areas (one area of a city vs. another) contribute to nearly identical practices selling for widely different prices. For example, practices in “high growth” areas typically sell at a higher price than “low growth” areas. In general, practices located in large urban areas are in greater demand than the suburbs, and practice values proportionately decrease the further out a practice resides. (Some coastal areas are an exception.) In addition, a dental practice sale’s price is directly related to areas with higher per capita income.

(2) PROJECTED PROFITABILITY: Projected profitability is based on past and present practice figures. Although it is difficult to sell future practice potential, any “windfall” profitability perceived by the purchaser will only enhance the potential selling price. Examples of potential “windfall” profits include specialty procedures such as endo, ortho, perio, implants, pedo, and other procedures that are referred out routinely to specialists rather service as “in house.” Although we are not able to translate potential into a specific dollar value, it can increase the likelihood of a sale at the desired price.

(3) SELLER FINANCING: The Seller’s willingness to finance a large part of the purchase price can often make an immense difference in the final selling price. This financing is preferably at a fixed interest rate and for a longer term than the usual bank financing.

(4) EXISTING EQUIPMENT AGE: Equipment value depreciates rapidly soon after its purchase. Overtime, it is less of a factor when determining overall practice value, especially in established practices.

The capitalization rate, or “cap rate”, is a percentage that determines the final value of a dental practice and is calculated by dividing earning by cap rate. Selecting the cap rate is market driven and reflects current economic and industry conditions, such as interest rates, inflation and the outlook for the profession and the community.

The most common method for determining the cap rate relies on a valuation of the risk factors that go into investing in a dental practice versus other investments. Most risk factors associated with the purchase of a dental practice versus the purchase of some other type of business are generally low, and the risk tolerance of each individual investor is, to a large extent, a personal matter. Common risk factors to consider when evaluating the cap rate used in the valuation of a dental practice are:

• Practice productivity trend
• Number of dental offices in a 5-mile radius
• Transferability
• New patient flow
• Years in practice in the area/years at current location
• Overall office appearance
• Age/quality of equipment
• Existing or future lease and terms
• Seller/bank financing
• Local economic outlook
• Other practices for sale in the area
• Staff attitude/turnover/skills
• Office Systems
• Accounts receivable/collections policy
• Parking/office access

Most appraisers use their knowledge of the market, the demographics of the community and the practice data to select an appropriate cap rate. The range of cap rates used to value dental practices varies from 18 to 35 percent, the lower rate representing less risk, and the higher rate representing greater risk.

It is also important to note that the cap rate only reflects the return on investment. It does not consider the fact that the new owner works in the practice to contribute to the overall gross collections. Selection of the cap rate is the most subjective process in the approach to determining the value of a dental practice.

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It is calculated using a company’s adjusted earnings, (adjusted earnings may include a dentist’s personal expenses that are run through a practice like an automobile) before interest expenses, taxes, depreciation, and amortization are subtracted, as a measure for a company’s current operating profitability. In dentistry, EBITDA represents the profit an investor or group would earn if an associate dentist produces the dentistry.

The EBITDA valuation method relies on a multiple of EBITDA to arrive at a company’s value. Dental practices are commonly sold for a multiple that ranges from 4 times EBITDA, to (in some rare case) 15 times EBITDA or more. There are multiple factors that contribute to the multiple used when valuing a practice or group of practices.

Value = Multiple x EBITDA