We regularly get dental practice buyers and sellers telling us that their accountant had advised them what a practice is worth. While I am sure that their accountant is good, competent and trying to be helpful… very few accountants have the experience with dental practice financials and access to comparable dental practice sale results to make that call.
Most dentists are using non-specialised accountants. That is to say, they use a local accountant, or one that their family has used for a long time, who spends their day working on clients in multiple industries. One hour they are working with a dentist, the next they are with a lawyer, or a plumber, or a pizza restaurant owner. In any given day they could be jumping back and forth doing work in 5 or more industries.
Non-specialised accountants like this may be extremely competent at:
- Keeping businesses tax compliant, payroll compliant and financially organised.
- Effectively managing bookkeeping, preparing tax filings, and ensuring that financial statements align with regulatory standards.
- Advising on entity structures and tax-effective ownership when buying or selling.
- Verifying historical data for due diligence when buying a business.
- Quoting valuation techniques that are commonly used across business.
However, when people rely on these general accountants for guidance on dental practice valuations, large gaps start to emerge that are not necessarily a reflection of competence, but rather of their scope and exposure to the dental industry.
Valuing a dental practice is not just about understanding financial principals and plugging numbers into a formula. Uncovering “maintainable earnings” in a dental practice often requires understanding the various legitimate reasons why financial revenue and collections may vary. It requires knowing how dentists are remunerated and which expenses are personal, non-recurring, or not required going forward. A defensible valuation also considers buyer demand and comparable sales results in that area, and how dental practice attributes like clinical range, key-person dependence, preferred provider status and lease terms impact that demand.
A valuation completed by someone with deep dental-industry experience can identify both potential and risk, by benchmarking the practice’s financials and clinical reporting against industry norms. For example, a specialist can often spot:
- Revenue mix that looks strong on paper but is not transferable (for example, heavy reliance on one clinician or a specialised type).
- Overheads that are unusually high/low versus dental benchmarks, signalling inefficiency or future cost pressure.
- Potential, under or overservicing of patients (evidenced by their use of different item codes)
- Premises lease or staffing, risks that can impact profitability immediately after settlement.
What’s at stake when the valuation is wrong
An inaccurate valuation is rarely harmless.
Overvaluation:
- When a vendor overvalues their practice, it can significantly compromise its chances of selling. (https://practicesalesearch.com.au/dental/articles/the-icarus-effect-on-practice-sales)
- When a buyer overvalues a practice, it can mean that finance (the banks) won’t support the purchase or that their financial life post sale becomes unnecessarily hard.
Undervaluation:
- When a buyer under-values practices, they can find that they miss out on practice after practice that would have been perfect for them because their offer is far beneath other competitive bids
- When a seller under-values the practice, they are financially making their lives post sale harder than it needs to be.
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