Rules of thumb are generalizations of what has been happening in the market, as well as what might be expected to happen in the market. Rules of thumb do not take into account specific elements of the practice being valued, but they provide a broad brush stroke to the dental practice value process.
Because of the lack of specific comparisons, rules of thumb cannot assure an accurate value of a particular practice. The most important consideration in the use of a rule of thumb is the accuracy of the information relied on. Often I hear someone make the statement, “I understand that practices are selling for 70 percent of gross.” Or, “I understand that practices are selling for one times net.”
The question to ask is, “From where do you understand this information?” The only valid determination of an accurate rule of thumb is to evaluate enough actual market data to begin to see a legitimate trend. Obviously, the data must be germane to your specific dental practice if it is to apply. In other words, if yours is a specialty practice and you are applying a data base generated about general dental practice sales and their relation to dental practice values, you are dealing in apples and oranges.
As you can see, the process of determining the value of a dental practice is much more complex than one might expect and the degree to which an appraiser uses one or more of the methods available usually is a function of the reason for the appraisal. If litigation, estate-planning or the sale of a practice requires an appraisal, it is important to select a qualified party who has the experience and market resources to provide a supportable valuation. If you`re just curious as to what your practice might be worth, use a rule of thumb – probably between 50 percent and 70 percent of gross (on a $600,000 gross revenue value between $300,000 and $420,000. For a swing of $120,000, it`s probably worth getting a legitimate dental practice appraisal).
Much of the “tug of war” that exists in this area can be minimized by staying focused on this reality. (i.e., the Purchaser and his/her representatives always think the appraised price is too high, and the Seller and his/her representatives always think that the price is too low!) If the price of your practice appears to be in line with comparable sales of practices in the general area, and the terms are structured to make it reasonably profitable for the Purchaser, then it’s very likely that the price will be considered an equitable one by a prospective Purchaser.