Understanding your valuation – Luke Moore

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  Posted by: The Probe      29th November 2017

The success of a dental practice sale is hinged on a number of variables, but when it comes to achieving a fair and accurate price that rests entirely on the valuation. This aspect of the transaction is often shrouded in mystery with the finer points misunderstood by those entering the fray, so to give you a better idea of how it all works as well as help you to understand why your practice is worth what it is, here’s what’s taken into consideration during the process.

Unlike a car where its worth is guaranteed to diminish the minute you leave the garage forecourt, a dental practice can either lose or gain value when it is sold. The best way to think of it is like an ageing bottle of wine. When all the right boxes are ticked and factors such as grape variety, wine region, winemaking style, storage conditions, and the condition of the bottle and the cork are spot-on, a bottle of fine, aged wine can be sold for an extraordinary price. These elements, amongst others, dictate the quality of the wine – including of course the opinion of knowledgeable sommeliers – and so it’s the combination of all the tangible and intangible aspects that determine its overall worth to consumers; it’s the same in dentistry. Like wine, valuers must consider a number of variables when calculating the worth of a dental practice, which in this instance includes market trends, type of contract, turnover and EBITDA (earnings before interest, taxes, depreciation and amortisation).

Current trends, as well as the ever-increasing demand for a high-performing profitable dental practice are especially pertinent, as we’ve been seeing for a while now that the average transaction value is on the rise. This is further highlighted through the big leaps in the multiples obtained across the board, particularly in private practice sales where the market continues to thrive. It must also be noted that the value of mixed practices has recently overtaken NHS practices, which if you look at percentage of turnover is interesting because mixed practices surveyed had a 161.69% of turnover in our goodwill survey, while NHS practices had 164.80%. This reinforces that using percentages of turnover to calculate a practice’s worth is not a reliable method.

As our latest goodwill survey results also indicates, purchasers are paying higher multiples of profit to compensate for increasing costs, but should trends change this would have a significant impact on valuations – something to bear in mind moving forward. Of course, the true value of a dental practice cannot be calculated on this information, which is why EBITDA modelling is also utilised – though never on its own as EBITDA does not produce an accurate depiction either.

What EBITDA does is removes all of the non-cash costs in your accounts, such as depreciation or the use of a home as an office, to evaluate the practice’s performance without having to factor in financing and accounting decisions and tax environments. Once the figure has been established, this is then multiplied depending on the company, market and economic climate. Generally, the lower the perceived risk and the more sustainable the profit is, the higher the profit multiplier. Our latest results show EBITDA to be 15.10 in private practice, 8.02 in mixed, 6.41 in NHS and 7.07 in NHS ortho. The adjusted EBITDA numbers, which reflect the obvious changes a purchaser would make post-completion, are 9.74 for private, 6.76 for mixed, 6.73 for NHS and 6.30 for NHS ortho.

What can be hard to get your head round is that your profit and loss EBITDA calculation as a vendor will not be the same as a buyers, as the EBITDA and multiples rely on each other to make the valuation work. Plus, there’s no guarantee that the EBITDA figure used is entirely accurate, since the amount of money you pay out on staff, materials, laboratory fees and so on is higher than what a potential buyer might spend.

Naturally, you’ll never be expected to completely understand how it all works, but it’s helpful to have a grasp of the science and art behind it. During the actual sale itself a specialist agency with dental specific experience will compile a valuation report, and will offer the necessary advice and support along the way to ensure that you stay up-to-date with the progress of the transaction.

When you use Dental Elite practice sales and acquisitions agency, you’ll receive a clear and comprehensive report detailing your current market valuation and how the valuation has been calculated, all for free with no pressure to commit. Selling a practice can be difficult at the best of times without becoming an expert on valuations, but with specialist help and the right preparation you can be sure that an accurate, fair and transparent valuation will be achieved.

For more information on Dental Elite visit www.dentalelite.co.uk, email info@dentalelite.co.uk or call 01788 545 900


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