How are dental practices valued?

Key facts

What are the four common valuation methods?

Baker Tilly, a CPA firm with a dental practice group, lists four methods and says most valuations average several together (Baker Tilly):

1. Capitalized excess earnings. An income method. Take average net receipts, subtract operating expenses and a market wage for the dentist's clinical work, then divide the excess by a capitalization rate that reflects risk. Baker Tilly notes professional compensation is typically estimated at 35% of adjusted doctor production (Baker Tilly).
2. Asset value. The appraised value of the tangible assets (dental and office equipment, leasehold improvements, supplies) plus intangibles (Baker Tilly).
3. Annual net receipts. A rule of thumb based on collections.
4. Average annual earnings. A method based on historical profit.

We don't publish multiples or percentages here. Rules of thumb vary by market, practice type and year, and a number on a web page isn't a valuation. Ask your appraiser which methods they used and why.

What is goodwill in a dental practice?

Goodwill is the value above the tangible assets: the patient base, the name, the staff, the referral flow. Dental Economics' roundtable explains the excess-earnings logic: cash flow is allocated to labor, tangible assets and intangibles, and whatever remains after paying a surrogate dentist for clinical work is excess earnings, which "must be present for goodwill to exist" (Dental Economics). The total value is tangible assets plus goodwill.

For tax purposes, the IRS puts goodwill and going-concern value in Class VII and other section 197 intangibles, such as a covenant not to compete or customer-based intangibles, in Class VI (IRS). A buyer generally amortizes section 197 intangibles over 15 years (26 U.S.C. §197).

What counts as tangible assets?

Equipment, furniture, computers, leasehold improvements and supplies. The IRS says furniture, fixtures, buildings, land, vehicles and equipment that are part of a trade or business are generally Class V (IRS).

How each is valued varies by firm. SVA, a CPA firm, describes its approach as one example: dental equipment on straight-line depreciation over a 12-year life, then a salvage value typically 10% of historic cost; leasehold improvements over roughly 15 years; supplies at one or two months of the prior year's supply expense (SVA). SVA also says large pieces of equipment should go to an appraiser.

Book value isn't market value. Dental Economics notes balance sheets carry assets at historical cost, and dental equipment's current value may be lower than book (Dental Economics). An adjusted book value uses an appraiser to restate each asset. See how to appraise dental equipment and valuing leasehold improvements.

Which standard of value applies?

The appraisal should say. Fair market value, in the tax regulations, is the price between a willing buyer and willing seller, neither under compulsion, both with reasonable knowledge of relevant facts (26 CFR 20.2031-1). The American Society of Appraisers also defines related standards for equipment, including fair market value in continued use, orderly liquidation value and forced liquidation value (ASA). The same chair can have very different values under each. A going-concern sale uses continued use; a closed practice may only get liquidation value.

Asset sale or stock sale?

SVA explains that in an asset sale the price covers the chosen tangible and intangible assets but excludes liabilities; a stock sale includes all assets and liabilities, including contingent ones, so an asset sale often brings a higher price (SVA). In an asset purchase, buyer and seller both report the allocation on Form 8594, and allocation to an asset can't exceed its fair market value (IRS).

How does equipment condition affect value?

Directly, in the asset-value method, and indirectly in every method, because the buyer prices in replacements. An outdated sensor, a server near end of support or chairs needing replacement are real costs. Jaffe Law's buyer due-diligence list asks for equipment ages, models and service records (Jaffe Law). See equipment due diligence.

What should I gather before a valuation?

Three years of financials and tax returns, production and collection reports, the lease, staff roster, and a complete equipment list with make, model, serial number, purchase date and condition. Buyers' attorneys ask for the same equipment ages, models and maintenance records (Jaffe Law). If your list doesn't exist yet, start with the equipment inventory template and the practice inventory checklist.

Which free tools help with this?

The equipment inventory & appraisal report (free tool, coming soon) is planned to turn your equipment list into an appraisal-ready report. The free equipment inventory CSV (coming soon) will give you the columns to start the list in a spreadsheet. The build-out cost & timeline calculator (free tool, coming soon) is planned to estimate build-out cost and timeline from square footage and operatory count.

How FloorStack helps

FloorStack is a dental build-out platform that also keeps the equipment record a valuation needs. The free Equipment inventory & appraisal prep tool (coming soon) will organize make, model, serial, age and condition for an appraiser. Floor Stack ($39/mo, billed yearly) keeps live inventory with specs, serials and warranty dates, and flags end-of-life gear (FloorStack). Starting from scratch? Download the dental equipment inventory template (CSV). Comparing buying with building? The free Build-out cost & timeline calculator (coming soon) estimates the cost of starting new. See the Dental Practice Appraisal hub.

Free tools for this step

• Equipment inventory & appraisal prep tool: appraiser-ready equipment list (free tool, coming soon).
• Dental equipment inventory template (CSV) (free download, coming soon): a spreadsheet to start today.
• Build-out cost & timeline calculator: compare buying with a de novo (free tool, coming soon).