Dental Practice Valuation Guidelines: Understanding Perceived vs. Actual Value Drivers

At a glance:

• The main takeaway: There are several dental practice valuation methods that can help dentists assess what their practice is worth.
• Impact on your practice: Understanding the difference between perceived and actual value drivers is crucial when determining the fair market value of a dental practice, or the price at which a practice would sell on the open market.
• Next steps: Aprio’s dental CPAs and advisors can provide the experience, knowledge, and guidance you need to properly determine the value of your dental practice and achieve the best-possible outcomes.

Schedule a consultation today to learn more

The full story:

In the first segment of our article series on dental practice valuation, we covered the situations, methodologies, and approaches you can use to understand the fair market value of your dental practice.

Remember that fair market value is the price at which a dental practice would sell on the open market, assuming both the buyer and the seller are acting in their best interests, without any undue pressure. It’s a value that reflects the price a knowledgeable and willing buyer would pay to a knowledgeable and willing seller, assuming both parties have access to the relevant information.

When considering what impacts the value of a dental practice, you must consider both perceived and actual value drivers. Understanding the difference between perceived and actual value drivers is crucial when determining the fair market value of a dental practice. Misjudging these can lead to either overvaluation or undervaluation, which could affect negotiations, financing, or long-term success for the buyer.

Perceived value drivers

Like its name suggests, perceived value comes down to perception, or what potential buyers believe your practice is worth. Perceived value drivers include:

• Brand reputation: How do current and future patients and members of your community feel about you as a practitioner, your staff, your services, and your approach to dentistry?
• Quality of facilities: What does your equipment look like aesthetically? Is it new or several years old? Does it function properly?
• Location: Is your office in a central geographic area and easy to get to? Are you situated in a convenient area for both current and future patients?
• Marketing and branding: How effective are your advertising efforts and which channels do you use to promote your brand? Is your website user-friendly? Are your business name and logo memorable?
• Patient experience: What amenities, communication, and services have you implemented to create the best-possible experience for your patients?
• Online presence: Is your business easy to find via search engines? Do you have a footprint on popular digital and social channels like Facebook, Instagram, and Google Business?

While perceived value drivers are important to your practice, it is important to note that they cannot directly impact top-line collections, nor can they impact cash flow. Therefore, it is often more appropriate to use actual value drivers to measure the fair market value of your practice.

Actual value drivers

Actual value drivers are the key elements of your practice that impact revenue and cash flow. When calculating what a dental practice is worth, professional valuators, or Certified Valuation Analysts (CVAs), will often analyze and review actual value drivers first; they consider these drivers to have a tangible, quantifiable, and direct effect on the final valuation number.

Actual value drivers include:

• Revenue, profitability, and cash flow: As we discussed in the first article of this series, valuators will focus on a practice’s collections (revenue), estimated cash flows, profit and loss statements, tax returns, and adjusted earnings to help determine the fair market value of your practice. Thus, revenue, profitability, and cash flow all have a tangible impact on what your practice is worth in the eyes of a potential buyer.
• Patient base: Do you have a strong existing, repeat patient base? Valuators will often look at recurring pieces of revenue (for instance, the hygiene program in a general dentistry practice, which we will unpack below) to help assess this value driver.
• Hygiene recall program: For general dentistry practices, hygiene appointments are a tool to appropriately assess this metric because it is the most consistent source of new and existing business for dentists. If hygiene appointment numbers are not strong, then the practice may not have consistent recurring revenue or collections, which could negatively impact its actual value.
• Digital radiography and electronic charting: If your practice uses a paper-based charting method or does not have a digital X-ray system in place, the actual value of your practice could decline. While the absence of this equipment doesn’t necessarily affect cash flow, it will leave a negative impression on most buyers because it translates into immediate dollars spent on updating the practice post-transaction.
• Occupancy lease terms and lease flexibility: The absence of a building lease or the inability to transfer or assign your existing lease to a future buyer directly impacts the value of your practice. Without the ability to assign an existing lease or without flexible lease terms, a future buyer may have to move the practice to a different location, which could result in lost patients and lost production and collections.
• Financial health: Strong historical financial health is an actual value driver for dental practices. This necessitates solid bookkeeping, accounting, and recordkeeping methods. Poor historical accounting translates into ambiguity surrounding key numbers and metrics that impact your practice’s financial picture and could make it less marketable to potential buyers.

The bottom line

By assessing both perceived and actual value, you can feel confident in knowing that your dental practice is accurately valued and fairly priced based on sustainable, measurable financial performance.

If you are interested in obtaining a dental practice valuation, contact Aprio’s experienced dental CPAs and advisors. We provide the dental acumen, resources and comprehensive services you need to evaluate your business, simplify the transition process, and achieve optimal outcomes.

Schedule a consultation with our team today.

Related Resources

Practice Valuation: How Much Is Your Dental Practice Worth?

The End Game: Critical Steps to Prepare Your Dental Practice for a Transition

Buying a Dental Practice: Going from Associate to Owner