Once again, Chris Mayer of The Heimat Group is answering your questions on practice valuations. Check out his previous No Stupid Questions answers:
This time, we asked Chris to describe the actual practice valuations process — the steps a professional valuator takes to determine what a practice is worth.
The dental practice valuation process is complex and encompasses a complete evaluation and analysis of every aspect of a practice. Typical steps include investigation, analysis, valuation, and documentation.
Step 1: InvestigationDuring the investigation process, a practice valuator conducts interviews with key practice management, including the office manager, CPA, and practice owner. The goal is to develop an understanding of the practice’s overall health. The valuator will:
- Develop an understanding of the practice’s background
- Evaluate historical financial results and statistics
- Review the past, present, and prospective operating results
Step 2: Analysis
Next, the valuator analyzes the historical operating and financial data. During this phase, the valuator will:
- Analyze historical operational results and statistics
- Prepare prospective operational and financial analysis, staffing, cost projections, capital expenditure requirements, working capital requirements, discount rate analysis, and cash flow projections
- Evaluate competitive factors, such as how many dentists are providing similar services in the local market
Step 3: Valuation
Once the valuator has analyzed the data and the market, they will estimate the fair market value of the practice’s fixed and intangible assets according to the most appropriate valuation methodology: the asset approach, the market approach, and/or the income approach. A valuator should consider all three valuation approaches and rely upon the most appropriate to:
- Estimate the value range based upon preliminary discounted cash flow, market approach, and cost approach
- Review the preliminary analysis with the practice owner (and potentially, the buyer)
- Deliver a final estimation of fair market value
Step 4: Documentation
Once a value has been established, the valuator will generate a report that outlines the analysis and findings, while also including the requisite source data that supports the recommendations. This report should be shared with potential buyers and their lender(s) as needed.
Want more practice valuation resources? Watch the recent Dental Economics webinar, What's This Practice Actually Worth? Chris Meyer joined ADAPT's Dr. Suzanne Ebert, VP, Dental Practice & Relationships to explore how to evaluate a practice, including the less tangible items.