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Valuing a practice in nine easy steps

Posted on December 10, 2019 in Articles & Frank Taylor & Associates

In this article, recently published in Private Dentistry Magazine (December 2019 issue), Andy Acton breaks down the process of valuing your practice accurately into nine simple steps.

 

Valuing a dental practice requires the gathering of information, the ability to analyse this information and access to comparable data to benchmark the figures to arrive at a goodwill value.

Establishing an accurate valuation is critical. With only 10,000-12,000 dental practices in the UK ensuring that your practice is compared to others that bear very similar characteristics is key. So often inappropriate comparables are used leading to an exaggerated valuation – which could be either high or low.

The age of the data being used is critical. The more current your practice information the better. Using accounts from eighteen months ago is no basis for a current day valuation. Equally you need to access comparable data from the past 3-6 months, even this data could well relate to valuation assessments from 6-9 months ago so the fresher the better.

Step 1: Make sure you own the information that is going to be used to value the dental practice or have the permission of the owner to use it. If you do not have the right to use this information then, quite reasonably, the rightful owner will be unhappy.

Step 2: Set time aside to prepare the necessary information which you will most likely want to do privately. You may well need to extract current figures from your practice management software, such as Software of Excellence, so this might need to be done over a weekend or in the evening.

Step 3: Financial data collection – this is will include your financial accounts for the past three years, fee income for the most recent 12 months, details of your income types whether NHS, private fee per item or plan based income. Being able to analyse income by treatment type is necessary too as they have differing levels of appeal. The financial data is a key driver in assessing the value, very simply, the more up to date and comprehensive the information, the more accurate the valuation will be. Your latest set of financial accounts should be no older than nine months from the year end in the accounts. So for example if your year end is the 30th September then the accounts should be available no later than the 30th June the following year.

Step 4: Property data collection – this will either be the current lease terms and or the freehold value. If a lease it is important to know if this is covered by the Landlord and Tenant Act 1954 which affords the leaseholder degrees of protection. If a freehold this provides excellent long-term security which in turn positively impacts the practice value. If the practices operates under a lease then the remaining lease term will be a factor. The remaining lease term very often influences the period over which a bank would lend to a would-be purchaser.

Step 5: Team data collection – the hours each person works, their role, how long they have worked at the practice and for and how much they are paid. The same is required for the self-employed clinicians too along with a split of their respective gross fees. If there is a single clinician that accounts for a significant proportion of the practice fee income this

The practice team are a key intangible asset at the practice, they deliver the services and have the relationships with patients.

Step 6: Practice data collection – this is the operational nuts and bolts of the practice. So, the services offered, opening hours, marketing techniques used and compliance certificates. The quality of the operational structure of the practice will directly impact on the management time required.

Step 7: Competitor analysis – review the local area, the distance captured will vary depending on your specific location. In a big city a perimeter of half a mile may be enough whereas in a rural location you may need to extend this to several miles.

Step 8: Use current comparable data to assess your own practice against others of a similar type to establish the true value. You may need to engage a specialist valuer to assist here as comparable data is critical to establishing an accurate value.

Step 9: Decide your next steps now you know the value of your practice. Often there are many options available if you have valued your practice for sale and all of these should be fully explored before deciding to pursue a certain path. Equally if the purpose is to arrange finance then a broker should be engaged to assess the options and range of funders available.

If you follow these nine steps you can be confident you will have an accurate and up to date valuation of your dental practice.

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