According to a survey by AES Nation of 208 successful dental practice owners looking to sell their practice within five years, about 70% have had a formal valuation conducted within the previous three years (see Exhibit 1). As dental practice owners get closer to deciding to sell their practice, we find that they tend to be more likely to have it valued. That makes sense, given that a formal dental practice valuation is often required when selling a practice.

​We see that when a formal valuation is done, the results are often unexpected. Consider that nearly 85% of the dental entrepreneurs surveyed by AES Nation said the valuation came in lower than they anticipated (see Exhibit 2). These dental entrepreneurs clearly had overestimated their practice's worth.

That's not terribly surprising, of course, given how hard they likely worked to build their dental practice and how emotionally invested they are in it. Still, this finding should give you pause as a dental entrepreneur. If your perception of your practice's value is too high, you might end up rejecting some solid offers from potential buyers. In fact, if your determination of the value of your practice is significantly greater than the value determined through a formal valuation, there might not be many buyers taking interest in your dental practice at all.

It's worth noting that 15% of the dental entrepreneurs surveyed by AES Nation were surprised by the formal valuation because it came in higher than they expected. That might sound like a pleasant surprise, but there are potential problems when you undervalue your practice. For example, you might take a low offer that is clearly not in your best financial interests.

The most interesting finding, to us, was that not one of the dental entrepreneurs said the valuation was "just right." This strongly suggests that a formal valuation is an important step in aligning perception and reality.

​Important: Keep in mind that a formal valuation is not necessarily the price your dental practice will ultimately sell for. Instead, this valuation is generally the starting point for negotiations---and it can be helpful in justifying a price.

So where to begin? There are a number of dental practice valuation methods that dental entrepreneurs should be aware of. The following is a brief overview of six commonly used dental practice valuation methods.

Market value practice valuation
This is a comparison of your dental practice with the sale price of similar practices. Comparative data is required. In some situations, such as those involving the sale of relatively small practices, such information is not available or may not be very informative.

The market value method can be a good starting point in helping determine what your practice is worth, and it helps start the discussions about selling your practice. However, it can be imprecise and is often quite subjective. Therefore, when this approach is used, your and your team's ability to negotiate becomes especially important.

Asset-based practice valuation
This is a balance sheet approach that calculates the practice's book value---its total assets minus the total liabilities of the practice.

ROI-based practice valuation
A buyer considering their return on investment (ROI) is calculating the potential payout from acquiring your dental practice. Issues that buyers are likely to consider include:

How long will it be until the investment is recovered?
What is the probable total payout from the investment?
Are there other opportunities that would provide a better ROI?
Discounted cash flows
Here, the projected cash flows of your dental practice are estimated and are then discounted to the present. Deciding on the best discount rate can sometimes be a nuanced and tricky process.

Multiple of earnings
The valuation is based on multiplying current revenues by a predetermined number. The multiplier is a function of the dental industry, the overall economic environment, the growth rate of the practice and other factors.

Capitalization of earnings
​This is a more extensive formulaic approach that takes into account cash flows and annual ROI. This valuation method is a snapshot in which the presumption is straight-line continuity. Therefore, it is most often used with very stable dental practices generating highly consistent results from year to year.

With six valuation methods to choose from, which one is best? The answer, of course, is "it depends."

The right approach for you will depend on a variety of factors (such as the size of your dental practice). Ultimately, valuing dental practices is part science and part art. For example, a valuation method that might have been appropriate for your practice in the past might not be viable now---if, say, your practice has changed course in some fundamental way. The growth and size of your practice, the changing dynamics of the dental industry, the stability of your practice, and other factors all can play a role in determining the "best" valuation approach.

What's more, you might end up wanting to sample multiple valuation methods to gain deep enough insights into which particular approach makes the most sense given your situation and the goals you're looking to achieve through the sale of your dental practice.

For these reasons (and others), it's often helpful to bring aboard a valuation specialist---someone who has the requisite skills to value your dental practice and who doesn't have any emotional attachment to your business. Such a specialist is likely to deliver a clearheaded, objective valuation and assessment.

​Armed with such an assessment, you can take steps to increase your dental practice's value (if necessary) and negotiate wisely and shrewdly to help you walk away with a better deal in the end.

It's important for dental entrepreneurs to work not just "in" the practice---the daily and weekly duties---but also "on" the practice by thinking big picture and long term about issues such as valuation. In our experience, dental practice owners who can do both (or, more likely, enlist expertise to help them do both) tend to generate better outcomes---today, next year and even decades from now.