Not All Valuations are Created Equal

Rule of thumb valuations are ones that are typically quoted and overly abused.  The typical rule of thumb in a dental practice is a value based on a percentage of the practice’s gross collections.  For metropolitan areas, the rule of thumb can be from 85% of collections up to 100% of collections.  For a rural area, the value is typically 65% up to 85% of collections.  Sounds simple and straightforward, but is it accurate?  There are several reasons it is not. 

The first reason is the practice may have a good gross production number, say $800,000, but it also may be mismanaged with a high overhead of $750,000, leaving $50,000 leftover for debt service and salary for the doctor.  Do you want to work for nearly nothing?  Using a rule of thumb approach, this practice would be valued at between $700,000 and $800,000 if in downtown Seattle or Portland.  The problem is that it doesn’t cash flow enough for bank financing.  Secondly, you don’t know what is being run through the gross revenue production number.  Is the practice on capitation plans, DSHS, or another low reimbursement program?  Low reimbursement means low money to the practice, narrowing the margins.  If you get a high volume of the low reimbursement programs, you can bump up your gross and leave little to pay off debt and doctor’s salary. 

Another valuation method that can be dangerous is called the cash flow method.  This method calculates an adjusted cash flow to the practice.  The valuator will then normalize a doctors’ salary and calculate a value based on how much debt the practice can afford to pay.  In some practices, the valuator will use a forecasted number to get the value even higher.  This helps the seller when selling a practice, but is bad for the buyer, as he or she is stuck paying a high debt payment each month.

Omni follows standards set by the Institute of Business Appraisers and the Society of Certified Public Accountants Certified Valuation Analyst program.  We have an Accredited Business Appraiser on staff as well as two Certified Valuation Analysts.  We use three different valuation methods to determine the value of a practice – the Production Acquisition Method, the Capitalization Rate Method and the Book Value method.  Each of these methods focuses on a different aspect of the practice.  After we calculate all three methods, we blend them to determine the total value of the practice.  Blending these methods gives us a value that looks at the assets, cash flow and overall collections of the practice – a full picture of the entire practice and not just a glimpse of one aspect of the practice.

If you are interested in hearing more about Omni’s Practice Valuations, send us an email or give us a call today – 877-866-6053.