Commercial Goodwill of Professional Practices: Dentists
A professional service business (“PSB”) is a service business performed by highly-skilled professionals in a specific field. Typically, these professionals have received advanced education, training, or certification, to verify their related skills.
A unique challenge in valuing a PSB is whether the underlying value beyond the net assets on the balance sheet is entirely personal in nature, and thus, not capable of being separated from that specific professional. Consider a cardiac surgeon. While the surgeon may have a professional corporation that generates significant revenue and profit annually, the value of those cash flows is not transferrable, since the expertise lies within the surgeon themselves.
There are many similar cases wherein a PSB primarily derives value from the knowledge and expertise of the professional, but certain professions are able to generate “commercial goodwill”, which can be transferred to a purchaser upon sale. Some of the most common examples of these professions are: accountants, veterinarians, optometrists, and dentists.
This article will provide further insights and considerations for dental practices.
Similarly to other businesses with commercial goodwill, dental practices are typically valued using an income approach, which requires the normalization of the income statement. Normalization refers to adjusting the income statement for non-cash (e.g. amortization), non-operating, non-recurring, and discretionary items (e.g. personal expenses), to arrive at a “normalized” expectation of annual cash flows.
Once normalized cash flows are calculated, a valuation multiple is applied to arrive at the value of the underlying business, subject to other adjustments. The valuation multiple is based on a number of factors, including, but not limited to the following:
- Practice Size and Profitability: Generally, larger and more profitable practices will earn a higher multiple.
- Location: Location is typically the underlying driver of size and profitability. A practice that is in an area with a high population or that receives high-traffic will typically have higher demand. This may result in increased prices, volume of clients, and profitability, which in turn, drives a higher multiple.
- Growth Potential: A practice in a growing community, perhaps with limited competition, may present the opportunity for increased patient inflow.
- Technology and Equipment: Modern client management systems and leading-edge equipment can maximize the efficiency and service offering of the practice.
- Staff and Operations: Well-trained, reliable staff and operating guidelines can contribute significantly to a higher valuation.
Additional Considerations When Valuing a Dental Practice
Further to the value drivers noted above, the following considerations can impact the value of a practice.
Patients
- Is there an updated list of patients?
- How many patients are assigned to each dentist?
- How far do patients live from the practice?
- How many new patients has the practice gained or lost over the last 3 years?
Practice
- What type of dental practice is it? General, specialty, solo, group, etc.
- Are the dental fees higher, lower, or average compared to other dental practitioners?
- What is the reputation of the dental practice?
- Does it have positive or negative reviews on social media relative to its competitors?
- What type of dental services are offered?
- Are there certain high-value or high-margin services that are not offered?
Operations
- What is the age and condition of office and equipment? If replacements are needed, this is a significant cost to estimate.
- Can the operatories and administrative staff be retained through an ownership transition?
- Is there a transferable lease in place that is reasonable with respect to market rates?
Each dental practice is unique, and each differentiating factor must be analyzed to determine the dental practice’s true value.
GG Observations
At Grewal Guyatt LLP, our team of experienced professionals can assist you with selling your professional practice by providing valuation advisory, tax planning, and other support services to maximize your proceeds when selling your business. Obtaining the services of an experienced advisor will provide you comfort and allow you to make an informed decision regarding the sale of your business. Please do not hesitate to reach out for more information.
