Whether you are looking to acquire your own dental practice or interested in selling or refinancing, you need to know how to calculate the value to facilitate the transaction. This article aims to discuss the methods used and critical aspects when valuing a dental practice.
The most common methodology and the one used by Chartered Surveyors to value the dental practice’s goodwill is the ‘profits’ method. It involves establishing the EBITDA of the business based on the performance of a reasonably efficient operator (also known as Fair Maintainable Operating Profit) and then applying a multiplier or using this as a basis of forecast cash flows to establish the value.
Fair Maintainable Operating Profit (FMOP) and Fair Maintainable Trade (FMT) may not necessarily represent what the business is actually achieving. Instead, it reflects what could be achieved by an average competent operator. For instance, if the principal dentist in the subject practice only works two days a week, you will need to consider if there is a scope to increase the turnover or perhaps have lower associate costs. Also, ‘unnecessary’ costs will need to be added back, and these may include salaries paid to family members, not business-related memberships and subscriptions and travel and vehicle expenses.
Other costs that will need to be analysed and compared with industry benchmarks include Materials and Laboratory Fees, Wages, Associate Fees and other costs. Therese are usually assessed as a percentage of turnover and costs that are above/below industry norms will need to be adjusted to arrive at a FMOP.
You will also need to establish the market rent of the subject premises and assess if it is different from the passing. If, for instance, you believe that the unit is under-rented based on the recent comparable data, the net profit may decrease at the point of a first lease event such as a rent review or a lease renewal. If it is a Freehold practice, you will need to establish the market rent and deduct it from the turnover as a cost.
The multipliers used are normally derived from comparable sale transactions of similar practices in the market. The most common aspects to consider when selecting a multiplier are as follows:-
– Geographic Location
– Contracts (is it private or NHS and proportion)
– Quality & Condition
– Trading Demand
– Historic Trading Profile
– Number of customers
The resulting capital value can then be analysed as a percentage of turnover for the most recent full accounting year and compared with that of similar recently sold practices.
Property (Bricks and Mortar)
It is essential to ascertain if real estate is involved, i.e. if the dental practice is sold subject to a commercial lease of say (10-15 years) or a Freehold/Long Leasehold title.
When analysing a Leasehold practice, it is crusial to assess the probability of relocation, considering the potential loss of profit and costs involved. This means checking the length of the term, identifying if there are any Landlord’s breaks and if the lease provides statutory renewal rights i.e. is drafted inside the Landlord & Tenant 1954 Act. An important consideration is that although the lease may be ‘inside the Act’ the Landlord may still exercise their right to oppose a lease renewal on grounds such as redevelopment and owner-occupation.
If you are analysing a Freehold practice, you will need to establish the value of the property. Depending on the nature of the asset, it can be valued using investment or comparable methods of valuation. An important consideration is that some dental surgeries have higher alternative use value (for instance converted houses in high-value residential areas) and will need to be carefully analysed to arrive at an accurate figure.
Dental Practice valuation is a complex process that requires a detailed analysis of the market and the practice itself. However, establishing your dental practice value is vital if you are looking to purchase or sell your dental practice. It is essential to have trusted advisors on your side to help you identify and address these matters. Copping Joyce Surveyors are committed to providing you with expert advice throughout the lifecycle of your practice, from acquisition to disposal.