When is the best time to pinpoint your practice’s true market value? Right now. An accurate valuation is equally helpful for making everyday management decisions as it is when you’re buying or selling.

By Kristen Jordan

EVEN THOUGH THEY can be scary to look at, most people keep a close eye on their investment portfolios. How else can you course-correct your choice of stocks or mutual funds? Maybe you don’t check their performance daily, but you certainly don’t go years without looking at your statements. Yet in my experience, far too many practice owners wait years between practice valuations. They should do so regularly.

A dental practice’s fair market value is an informative metric, just like production or cash flow or overhead. Depending on your thinking, it could be the most telling metric of all because it reflects the cumulative impact of all your business and management choices. Is your valuation consistently rising? You’ve plotted a pretty secure course. Fluctuating? That can be of concern, though not necessarily, if there’s unexpected turmoil to navigate or a long-term strategy at work. And obviously, a series of separate valuations trending downward needs to be addressed, regardless of how good your balance sheet looks, because there are underlying problems just waiting to drag your earnings down.

An accurate assessment determines a practice’s fair market value—how much a buyer would be willing to pay for it. That’s important because, as unpleasant as it is to think about, you never know if you might need to sell. A solidly executed valuation will reveal what you could cash out for right now if you don’t have the luxury of waiting for the “right” buyer to materialize. In some cases, it’s a brutal but necessary truth that offers an opportunity to build value. A valuation might also reveal that your practice is worth more, even much more, than you estimate.

During a valuation, your consulting partner will evaluate your financials to determine true cash flow and expenses. My team uses a blended approach that includes an analysis of market conditions, comparable sales and investment potential. This is where the experience and judgment of your consulting partner comes into play, because more-experienced analysts have a better gut feeling about what those numbers mean. They can also provide concrete guidance on ways to increase the practice’s value.

In some cases, it’s a brutal but necessary truth that presents a real opportunity to build higher value. A valuation might also reveal that a practice is worth more, even substantially more, than the owner estimates.

Clearly, there are circumstances when ordering a practice valuation is necessary, like buying, selling, merging or adding a partner. Other times, however, it might seem optional: when a practice is considering adding an associate, say. In this case, if practice revenue has peaked but the owner wants more growth, a valuation will help determine if adding an associate makes sense.

When it comes time to sell or retire, a valuation is critical. Pricing a practice too low means cheating yourself. Pricing it too high can alienate potential buyers.

Your practice is like any other investment in your life, except for one thing: While you can log onto your brokerage’s website anytime and check the value of your portfolio down to the penny, you’ll need to hire an expert to calculate the real-world value of your practice. How often is too often? Certainly no more than once a year, but no less than every two or three years if you want to use it as a metric, track trends and ensure that your value isn’t fluctua­ting or decreasing. Understanding value in this context is a great way to protect what is likely your biggest investment, and it’s one of the smaller costs you’ll incur in the grand scheme of things.

KRISTEN JORDAN is Benco Dental’s Practice Solutions Manager, specializing in revenue analysis. She has been an office manager, regional manager and operations executive for several large practices. Contact her at kj8713@benco.com or practicecoaching@benco.com.