02 Jul “RULE OF THUMB” PRACTICE APPRAISALS
One-half of your annual gross production OR maybe your practice net income plus equipment replacement costs OR perhaps 25% of annual gross collections plus 25% of annual gross production plus original equipment cost for all equipment that is less than 2 years old OR maybe it is a fixed percentage of the gross annual collections. What easy ways to value your practice… if only any of these methods were accurate.
These are just some of the “rule of thumb” appraisal methods that have been featured in prominent national dental publications by various “experts” on the subject. Simply amazing!
A “rule of thumb” is simply a generalization of what has been happening in the marketplace, as well as what might be expected to happen in the marketplace. A “rule of thumb” does not take into account specific elements of the practice being valued, but rather provides only a broad-brush stroke to the overall valuation process. Due to the inability to compare specific practice components, a “rule of thumb” valuation cannot possibly assure an accurate value for your dental practice.
A dental practice is a complicated personal service business consisting of many unique and extremely important components. By placing a value on a practice based on a “rule of thumb”, the owner/doctor runs the risk of significantly overvaluing the practice and never selling it or drastically undervaluing the practice and losing tens of thousands of dollars.
A dental practice is comprised of both tangible and intangible components. Effectively analyzing and accurately assigning a weighted significance to each of these components takes vast experience and an incontrovertible understanding of the marketplace. While gross production, gross collections, and equipment value each affects the valuation, these components represent only a portion of the total valuation process. Such dynamics as the practice location; telephone numbers; parking convenience; accessibility from major streets; quality and mix of the patient base; staff experience and quality; growth potential; organization and effectiveness of office systems; number of competing dentists in the area; fee schedule; size and appearance of the office and building; and major employers in the area (to name just a few) are each key factors in determining an accurate fair market value.
Below is an example of why the rule of thumb” practice valuations cannot possibly be accurate. Suppose you have two similarly sized practices and you wish to use a valuation method of 6 months average production:
| PRACTICE A | PRACTICE B | |
| Average Monthly Production | $54,000 | $54,000 |
| Number of Treatment Rooms | 5 Equipped | 5 Equipped / 1 empty |
| Average Age of Equipment | 12 Years | 4 Years |
| Square Footage of Facility | 2,100 | 2,800 |
| Rent | $14.00 / sq. ft. | $11.50 / sq. ft. |
| Lease Terms | 3 yrs. / no renewal | 10 yrs. + 5 yr. option |
| Location | Inner City | Suburban |
| Patient Mix | 45% FFS / 55% PPO | 100% FFS |
| Office Systems | Peg Board System | Fully Computerized |
| New Patients per Month | 15 to 20 | 35 to 40 |
| Overhead % | 68% | 53% |
| Staff Turnover Rate | 3 in past 24 months | 0 in past 24 months |
Based on the “rule of thumb” value of 6 months average production or a fixed percentage of the gross annual collections method, Practice A and Practice B would have the exact same value. Do you really think these two practices should sell for the same price? Of course not! Call PARAGON for an accurate valuation of your practice.
Call PARAGON for an accurate valuation of your practice.
