How are dental practices valued?

Hey everyone. This is an AI conversation covering our recent personally authored blog post on our Practice Orbit website. Enjoy.

All right, I know what you're thinking. Dental practice, valuation. Whoopi, right?

Yeah. Not exactly the most exciting topic, but.

Hold on, because this deep dive is going to take you behind the scenes of a surprisingly competitive market. We're going to uncover how the worth of a dental practice isn't just about, you know, crunching numbers.

It's not just about the numbers.

It's about emotions, gut feelings, even a little bit of psychology.

It really is. Psychology plays a big role.

Think about it. You walk into a dental practice for the first time. Maybe it's sleek and modern, or maybe it feels like stepping back in time. Oh yeah, those first impressions that get feeling you get can actually influence how much someone's willing to pay for that practice. So get ready because today we're going to break down both the science and the art of dental practice valuation.

Sounds good.

To help us navigate this surprisingly fascinating world, we're going to be diving deep into an insightful article from Practice Orbit. Practice Orbit, a platform that connects buyers and sellers in the dental practice market.

Yeah, they're a big player in the space.

What's so interesting about this topic?

Well, it's that it brings together these two seemingly different worlds. You've got the hard, cold logic of finance and then the subjective, sometimes even emotional perspective of a buyer.

Right. So let's start with the science side of things. The article mentioned something pretty surprising. Banks will often loan 100% for dental practices. I mean, when you think about it, how often do you hear of a bank fully financing a business?

Yeah, that's not very common. You're right.

So why is that?

Well, it's precisely why understanding the banker's perspective is so crucial when it comes to dental practices. That loan amount they're willing to give, it sets the stage for the whole selling price. It essentially becomes the foundation for what a buyer can expect to pay.

So it's all about the numbers for the banks then. Right? Just crunching those spreadsheets?

Well, it's more than just looking at the current snapshot of a practice's financials. What's really fascinating is that banks are laser focused on future profitability. They're trying to spot those practices that are poised for growth and long term success.

So they're not just looking at how much the practice is making right now.

Right.

But its potential to grow. I'm intrigued. Tell me more about how they figure that out.

It's all about a technique Called add backs. It's a way for banks to adjust the financials to get a clearer picture of the true recurring income and expenses a buyer will face.

Okay, that sounds a bit technical. Can you break that down for me?

Sure. Imagine a practice received a big one time government stimulus like that PPP loan many businesses got a while back.

Right? Right.

Let's say it was $50,000. Well, a bank would actually remove that from the income calculation.

Okay.

Because it's not something the buyer can rely on for future revenue.

So they're trying to filter out any unusual or temporary financial bumps to see how the practice really performs day to day.

Exactly. They'll also do the opposite, adding back expenses the seller had that the buyer won't think of things like the seller's salary, their personal travel, or even their kids allowance if it was listed as a business expense.

So it's like a financial detective story.

That's a good way to put it.

They're stripping away all the noise to get to the core of the practice's earning power. Okay, so once they've done all these adjustments, how do they actually put a dollar figure on it? How do they decide what that loan amount will be?

Well, there are a few key formulas banks use based on collections and profit.

Okay.

For example, they might look at 85% of collections or. Or 2.2 times the profit.

Got it.

The point where those two numbers intersect gives them a starting point for what they might lend.

And so there's a lot of number crunching going on behind the scenes.

Oh, absolutely.

But it can't be as simple as just plugging numbers into a formula, can it? There must be more to it.

You're absolutely right. Banks also factor in the global debt coverage ratio. This compares the practice's expected net profits to all its debt payments, including any personal debt the buyer might have.

Oh, wow.

Basically, it's a way to measure if the practice's profits can comfortably handle all those financial obligations. A healthy ratio signals a lower risk for the bank.

So they're looking at the practice's financial health and the buyer's financial stability as well. That makes sense.

Yeah.

But there's something in the article that I found a bit odd. It says that bankers rarely visit a practice in person. Doesn't that seem strange? I mean, you'd think they'd want to see what they're investing in.

It does seem a bit counterintuitive, doesn't it? Yeah, but this is where things get really interesting. Because while those financial formulas are important, they only tell part of the story. And this is where we start to move from the science of valuation to the more emotional, human side of things.

Now that sounds like my kind of territory. What are these emotional factors that don't show up on a balance sheet? Okay, so we've got this picture of bankers scrutinizing spreadsheets, calculating ratios, and basically trying to predict the future of a dental practice. You're telling me there's this whole other layer, this emotion, emotional aspect that comes into play. I'm all ears.

Absolutely. Think about it. You're a dentist looking to buy a practice. You walk in and the waiting room feels like a time capsule from the 1970s. Outdated magazines, worn out furniture, that faint scent of, well, who knows what. How excited are you going to be about taking over that practice? Even if the numbers look good on paper?

Yeah, I'm already getting a bad feeling just thinking about it. You're right. First impressions matter. I can see how a modern, well maintained office could boost a practice's appeal.

Exactly. And it goes beyond just aesthetics. Location is huge.

Right?

A practice in a thriving, family friendly suburb is likely to be seen as more valuable than one in a rural area with a shrinking population.

Makes sense.

Remember that example from the Practice Orbit article? The three UP practice in the small town versus the six UP practice in Coronado. Location can be a deal maker or a deal breaker.

Real estate, they say location is everything. And I guess that applies to dental practices too. But what about the patients themselves? I mean, isn't a solid patient base one of the most valuable assets a practice can have?

You hit the nail on the head. A loyal, well established patient base is like gold for any dental practice. These are patients who are already familiar with the practice, trust the staff, and are likely to keep coming back for years to come. It takes time and effort to build that kind of trust, and buyers are willing to pay a premium for it.

So we're talking about things like location, the look and feel of the office, the equipment, the size of the practice, and of course, that all important patient base. These are all things that can make a practice more attractive to a potential buyer, even if they don't have a specific line item on a financial statement.

Precisely. And while these factors might not be as quantifiable as, say, the global debt coverage ratio, they can have a huge impact on a buyer's perception of value. In fact, these emotional factors can sometimes create a bidding war, driving the price up even higher than the bank's initial valuation.

Wow. So it really is like a combination of art and Science.

It is.

It reminds me of buying a house. You can look at all the specs online, the square footage, the number of bedrooms. But it's not until you walk through the door and actually feel the space that you truly connect with it. Sometimes you're willing to pay more for that feeling, for that emotional connection.

Are you looking to sell a dental practice? If you're a seller, how do you find a strong list of potential buyers? There's no MLS or Zillow for dental practice sales in such a fragmented market. With transaction costs so high, many dentists selling their practice feel discouraged. That's why I built practiceOrbit.com practice orbit is modernizing how dental practices are sold through its online marketplace platform. It brings together buyers, sellers and their professional teams directly. Sellers can easily and anonymously showcase their practice on the site for free. Practice Orbit offers two options to sell your practice. Are you looking to buy or sell a dental practice? If you're a seller, how do you find a strong list of potential buyers? There's no MLS or Zillow for dental practice sales in such a fragmented market, many dentists selling their practice feel discouraged. That's why I built practiceOrbit.com practice orbit is more modernizing how dental practices are bought and sold. It's a platform technology. Y' all know them Zillow, Airbnb, Uber, and OpenTable, just to name a few. These technologies do two things. First, they help match buyers and sellers by centralizing the marketplace. Second, once the match between buyer and seller is made, these technologies help them navigate the sale to a successful close. Here are a few of the features inside a Practice Orbit users can determine a reasonable sale price for forward practice in just minutes. All they need is the most recent business tax return. Practice owners can use the directory to find important service providers like practice brokers, attorneys, accountants and bankers. Practice owners and their brokers can invite those service providers into the platform so all parties are coordinating the sale together. Practice owners will have a beautiful digital listing of their practice like a home on Redfin. And importantly, the listing will be anonymous and personal information like your address, name and pictures are only released after an NDA is signed and approved by you or your broker. Practice buyers can create saved searches to be auto notified when new listings come on the platform that fit their desired specialty and location. And hey, dental practice brokers, you can list all your practices on the site for free. By doing so, you'll get access to Practice Broken Orbit's large pool of buyers, all of whom have created profiles and saved searches to be auto notified when new listings come for sale. You can use the platform to introduce your listings to a targeted set of buyers. Additionally and optionally, you can use the platform tools such as a built in NDA, a customizable loi, and a workflow tool to navigate the sale from LOI to closing. In fact, you can manage all your listings on the system, from listing the practice to NDA to loi, and finally to closing the deal. Create your free account today at www.practiceorbit.com.

One. For 2% of the sale price fee, you'll get access to all Practice Orbit tools to sell your practice, along with a dedicated human assistant to coordinate the sale. And you only pay that 2% if you sell through the Practice Orbit system. Option 2 Practice Orbit also offers a fully brokered option of 4 to 6% of the sale price. With our fully brokered option, you'll be assigned an experienced practice sales agent to help you determine a price, identify a buyer and navigate the entire transaction. If you're thinking about selling your dental practice, create your free account today at www.practiceorbit.com.

That's a great analogy. And just like with a house, these emotional aspects can make or break a deal. When it comes to dental practices, buyers are investing in more than just equipment and patient files. They're investing in a lifestyle, a community, and the potential to build something special.

So we've got the science, the banker's perspective with all those formulas and financial ratios and the emotion, those intangible factors that tug at a buyer's heartstrings. But how did these two forces actually come together to determine what a practice is truly worth?

The article highlights that it's a delicate dance between the two. The bank's valuation sets a baseline, but those emotional factors can either enhance or detract from that number. Okay, think of it like this. The financials are the foundation of the house, but those emotional factors are what make it a home.

I like that. So a practice with fantastic financials but a really outdated office and a less than ideal location might not fetch as high a price as a similar practice with a modern, well equipped office in a prime location, even if the bank values them similarly at first.

That's exactly right. It's all about finding that sweet spot where the numbers make sense for the buyer. And the practice itself ticks those emotional boxes, creating that feeling of this is the one.

This is where things get really interesting for both sellers and buyers. Right? Because if you're a seller, you can actually take steps to boost both the scientific and emotional appeal of your practice. It's not just about the numbers. It's about creating a place that people want to be a part of.

Absolutely. And the Practice Orbit article gives some great advice for sellers.

Okay.

First and foremost, they need to focus on those financials, increase collections and reduce expenses. A healthier bottom line makes your practice more attractive to both banks and buyers.

That makes sense. Yeah. A profitable practice is always going to be more appealing. But what about those emotional factors? Can a seller actually improve those? Can they make their practice more emotionally appealing?

They absolutely can. It's all about creating a positive, welcoming environment. Think about sprucing up the office. Fresh paint, new flooring, updated equipment. Remember, first impressions are everything. You want potential buyers to walk in and feel like they've stepped into a modern, thriving practice.

Like staging a house for sale.

Exactly.

You want to highlight its best features and make it feel inviting so that buyers can picture themselves living there.

You've got it. And it's not just about aesthetics. It's about creating a positive work environment for your staff and a comfortable experience for your patients. Happy staff and happy patients translate to a more successful practice. And that's something buyers are always looking for.

So for sellers, it's a combination of being financially savvy and creating a practice that people genuinely enjoy being a part of.

That makes a lot of sense.

Now, what are the buyers? What tips does the article offer? For those navigating this competitive market, it.

Boils down to being proactive and building relationships. Don't just rely on your banker's valuation. Get out there, visit practices, talk to sellers and get a feel for the market. You might discover something special that wouldn't have shown up in a spreadsheet.

So networking and good old fashioned relationship building are still important, even in today's digital world. You can't just rely on algorithms and online platforms to find the perfect practice.

Exactly. Building a rapport with a seller can give you a real edge, especially in a competitive market. It's about more than just the transaction. It's about finding the right fit. A place where you can see yourself building a future.

And the article even suggests that buyers might need to be willing to go above the bank's valuation to secure a truly special practice. Sometimes you have to be bold and make a strong offer to show you're serious.

That's right. If you find a practice that really checks all your boxes, a place where you can envision yourself thriving, sometimes you have to take a leap of faith. Remember those intangible factors, that emotional connection you feel with a practice can be worth a premium if it means finding the perfect fit for your career and your life.

So for buyers, it's a delicate balance between being strategic, doing your due diligence, but also listening to your gut, knowing when to trust your instincts and perhaps take a calculated risk.

That's a great way to put it. Buying a dental practice is a big decision. It's not just about the numbers. It's about finding a place where you can build a career, build relationships and ultimately feel fulfilled.

So as we wrap up our deep dive into the surprisingly complex world of dental practice valuation. Yeah. It's clear that it's much more than just crunching numbers.

It's a fascinating mix of objective financials and subjective appeal. Those hard numbers set the stage, but those emotional factors can truly make or break a deal.

For sellers, it's a good reminder that a healthy bottom line is crucial. But so are those intangible elements that make a practice stand out. It's about creating a place that people want to be a part of.

Exactly.

Both patients and staff, both investing in updates, creating a positive work environment and building those strong patient relationships. All of these can significantly boost a practice's value when it comes time to sell.

Absolutely.

And for those of you on the buyer side, it's about being strategic, doing your due diligence, but also being ready to seize a great opportunity when you find it.

Be ready.

Sometimes you have to trust your instincts and be willing to go that extra mile to land the practice that feels right.

You got it.

So here's a final, thought provoking question for you to chew on. If you are buying a dental practice, what would be your top emotion factor that might make you pay more than the bank's valuation? What's that one thing that would make you say, this is the one I've been searching for.

It's a question worth pondering because it really gets to the heart of what matters most when making such a significant investment. And on that note, we'll wrap up our deep dive into the world of dental practice valuation. Until next time, happy diving.

So, as we wrap up our deep dive into the surprisingly complex world of dental practice valuation.

Yeah.

It's clear that it's much more than just crunching numbers.

It really is.

It's a fascinating mix of objective financials and subjective appeal. Those hard numbers set the stage, but those emotional factors can truly make or break a deal. It's true. For sellers, it's a good reminder that a healthy bottom line is crucial. But so are those intangible elements that make a practice stand out. It's about creating a place that people want to be a part of, both patients and staff, investing in updates, creating a positive work environment and building those strong patient relationships. All of these can significantly boost a practice's value when it comes time to sell. And for those of you on the buyer side, it's about being strategic, doing your due diligence, but also being ready to seize a great opportunity when you find it. Sometimes you have to trust your instincts and be willing to go that extra mile to land the practice that feels right.

Absolutely.

So here's a final, thought provoking question for you to chew on. If you were buying a dental practice, what would be your top emotion factor that might make you pay more than the bank's valuation? What's that one thing that would make you say, this is the one I've been searching for.

It's a question worth pondering because it really gets to the heart of what matters most when making such a significant investment. And on that note, we'll wrap up our deep dive into the world of dental practice valuation. Until next time, happy diving.