Five reasons to get a valuation before buying a dental practice
What do you do if you’ve found a practice but have no idea if the price is right, or even if the financial calculations you have been given are correct?
Here’s how a valuation ahead of buying a dental practice can help you:
1 Accurate assessment of value
To be accurate, a practice valuation should be based on the current income, current staff costs, current associate and hygienist/therapist costs, and standard expenditure from the latest set of accounts. It should not rely on historical data e.g. staff costs from previous accounts, or proposed future income. A valuation is the perfect time to obtain all current information. Two EBITDA (earnings before interest, tax, depreciation and amortisation) models will then be calculated (Associate Led and Principal Led), to show projected profit for a new owner.
An experienced dental practice valuer will be able to identify where costs may be too low to maintain, unwarranted costs have been removed, or if the best set of accounts have been used when the practice was valued for the seller.
A practice valuation is a detailed financial analysis that cannot be done thoroughly from just the last 3 years’ accounts. In an ever-changing market, only an advisor with daily experience in dental practice sales has the knowledge to ensure that you are not paying above market value for a practice.
2 Identify strengths and weaknesses
Within a valuation, a valuer will highlight any areas that may need your attention as a new owner. Perhaps the practice is currently understaffed and an additional nurse is needed to provide sufficient holiday and sickness cover. Or maybe the practice is overstaffed and you will need to make redundancies to ensure continued profitability. It could even be as simple as the valuer advising that lab costs are higher than average and you may wish to change provider.
Equally, the valuer may comment that everything at the practice is working great and that this isn’t a practice to miss out on.
3 Negotiation power
Should your valuation come back lower than the seller expects for the practice, you will have a full report from an experienced practice valuer that clearly explains how the value has been calculated. With this, you can discuss each point with the seller to hopefully come to an agreement on price.
Conversely, the practice valuation may come back higher than the asking price. In this case you can proceed with assurance that you are buying well, hopefully being able to secure your dream practice with renewed confidence in its value.
4 Financial planning & bank funding
A valuation will give you an open market assessment of the practice and the projected profit under both an Associate Led and Principal Led model. However, you will still need to factor in your personal costs e.g. tax and loan repayments, to determine what you will have left to live on. Having a valuation ahead of personal projections will save you time and money in calculating this.
A valuation report provides the necessary financial information required by lenders to assess the viability of providing a loan for your proposed purchase. With high interest rates making borrowing tighter for buyers, being able to provide a lender with clear workings of the projected profit can often speed up the process to obtain a loan offer.
5 Save on fees
As soon as your offer is accepted on a practice you will start to incur costs – a deposit, legal fees, and bank instructed valuation are usually the first of these.
A bank valuation now costs in the region of £2,000 – £3,000 and marks a crucial point in your purchase. The bank will only lend based on the value provided by their panel valuer. Therefore, should the valuation come back significantly lower than your offer, you would either need to reduce your offer for the practice, or make up any difference in cash. Should the seller choose not to accept a reduced offer and proceed with another buyer, you won’t be able to recoup the funds spent on the failed purchase. Having your own valuation ahead of the bank instructed valuation could therefore highlight potential issues in advance and save you thousands in lost fees.
We know buying a dental practice is a big step. That’s why we work daily with buyers to ensure they have the information they need to proceed with confidence, in turn helping sellers find committed buyers. Contact PFM Dental Sales & Valuations to instruct your purchase valuation on 01904 670820 or email sales@pfmdental.co.uk.
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