Valuation, valuation, valuation2nd February 2017
Martyn Bradshaw, a director of PFM Dental, explains why asking the right price when selling your practice is absolutely vital
This article was first published in Scottish Dental Magazine Jan-Feb 2017.
For most dentists, their dental practice is their largest investment and, as such, its sale needs to be treated very seriously. Getting it wrong can cost tens of thousands, if not hundreds of thousands of pounds in lost sale proceeds.
The market has evolved considerably over the last decade and even over the last few years there has been much change in the demands of buyers and values being achieved. Therefore, I suggest that anyone who is looking to sell their practice (even if this is an internal sale) requests a valuation by someone who is active in the market. By this I mean someone who is in touch with current trends and conditions.
Taking everything into account
A typical valuation should be based on a multiple of the adjusted profitability, whereby tax reducers and personal items are added back to the profitability. However, there are many unique situations such as where a principal is working part-time with a full-time associate where the distribution of income (thus effecting profitability) should also be calculated. The experienced valuer will know exactly what needs to be amended and, as some of the income multipliers can be as high as six, a £10,000 cost which has not been taken into account could result in a £60,000 loss of sale price.
This valuation basis will consider the adjusted profitability of the practice assuming that a principal is working at the practice full-time. Once this has been calculated, a multiple is then applied to the calculation dependent on location, type of treatments, demand for the area and the practice set-up (for example, how much future investment is required).
This model will often work better for single-handed, small, multi-surgery practices as a principal is required to be working in the practice to generate a (reasonable) profit.
This valuation will often benefit the larger but (more importantly), more profitable practices. Once all the adjustments have been calculated as above, we add the principal back in as an associate (thus putting an extra associate cost in).
The profitability would obviously be lower than a principal-led model, due to the extra associate cost. However, a higher income multiple is used so, for the more profitable practice, this can lead to a higher valuation figure.
Which valuation model to use?
The valuation method used is determined by which gives the better value. If the principal-led model provides a higher value, the practice would be valued/sold on this basis. What it means, however, is that financially the practice would generally only work for someone who wants to work in the practice.
If the associate-led model works better and this valuation is used, the practice would interest both dentists looking to work in it. It would also open up interest from Body Corporates and small corporates who would work in the practice.
At PFM Dental, we always calculate both methods to determine which provides the better value and, in consequence, the likely types of purchasers of the practice. There can often be a number of things the practice owner can do to improve the profitability levels and we discuss these with clients as, once again, each £10,000 difference in profit using an income multiplier of six generates a further £60,000 in sale price.
When selling your practice, it is always best to speak with an expert who can undertake an independent valuation for you. Make sure you choose someone with daily involvement in the selling of dental practices.
Information on practices currently for sale is on this website.