The Dental Practice Acquisition CPA: Paying too Much?

Yes. You are paying too much for this dental practice purchase, but the real question is whether the purchase price positions you for success. A dental practice acquisition CPA can help you through this. If there is an appraisal, then it will likely include three approaches in determining value. Those three approaches include: market approach, net asset approach, and capitalization rate (cap rate). Those three approaches are typically married to provide one single value. These approaches tend to result in similar valuations. While these methods are standard for the dental industry, at the end of the day the practice still has to be affordable. Finding a dental practice acquisition CPA for your dental practice buyer representation is a great help. Acquiring a dental practice can be stressful, and a successful dental practice acquisition takes planning. The assistance of a accounting firm who can help with due diligence CPA services can put your mind at ease.

When determining affordability, there is only one question you need to ask yourself: Will the cash flow service the debt while providing enough cash flow to maintain your current debt requirements?

The first thing purchasers should do is assess their cash needs. An inventory of all of their monthly bills should be taken. That includes everything. But don’t forget to include student loan payments, retirement saving (yes, retirement savings), monthly house payment, and health insurance. Health insurance is often forgotten because it is one of those expenses that buyers aren’t used to paying themselves. Then determine what the annual loan payment will be on your practice loan. If those expenses are less than what the current doctor is paying themselves annually, then you have put yourself in a position to succeed. Practice growth will be welcomed but not necessary in order to cover your bills.

Also take the time to read: 5 Financial Must-Dos Before Buying a Dental Practice

Market Approach 

The market approach can be provided by a professional. However, doing your own homework will get you there are well. 

The market approach is nothing more than finding out what someone else paid for a similar business. This is similar to what home appraisers do when they value you house. They find “comps” — comparable house in the neighborhood of similar size. And if a similar house or business down the street sold for $300,000, then it is likely that what you are interested in would cost similar.

Net Asset 

For a dental practice, the net asset approach tends to be a less stable valuation approach. While getting an appraisal on the tangible dental equipment and fixtures is relatively easy, it is the intangible value of the business that is going to impact the purchase price most. When accountants and appraisers speak of intangible assets, most commonly they are referring to Goodwill. Goodwill makes up to 60% to 80% of a transaction. It also tends to be the area of the most subjectivity.

Capitalization Rate 

Different industries will use a different capitalization rate (cap rate). Dental practices will typically use a cap rate of 20% to 30%. That cap rate is multiplied by the profits, which for dental practices includes net income, owner salary and benefits.  For example, if a practice has a net profit for the year of $180,000 and a salary of $200,000 and benefits of $20,000 and then a 30% cap rate is applied, then the estimated value for the practice would be $520,000.

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