DSO Practice Valuation Methods: Comparables

The formal definition of fair market value is the price of an asset that would change hands between a willing and information buyer and seller. The practical definition is the price someone is willing to pay for an asset. 

Dental service organizations and private equity backed group dentistry practices have grown significantly in the past decade for several reasons. One of the primary reasons for this growth is that these organizations offer higher purchase prices for the practices. The focus of this article will discuss how these organizations value potential targets.  

What are Comparables (Comps)?

Comparables (comps) are used in valuations where a recently sold asset is used to determine the value of a similar asset. Professionals and those engaged in transactions will examine the characteristics and prices of similar deals and opportunities to establish a purchase or sales price. This method of valuation is also referred to as performing a “private comps analysis”.

This is similar to a home appraiser’s valuation of a home; professionals seek out and analyze private and public market data to assess the value of a particular company. To perform this yourself, you must examine the target company and then find and compare it to similar companies that have been sold or acquired within a relatively recent timeframe.  

The analysis is deeper than comparing EBITDA or gross collections. When performing a private comps analysis, additional financial factors must be considered, like profit margin, costs of goods sold, financial ratios and other industry benchmarks. The idea is that the firm in question should be evaluated and valued in comparison with its rivals.

Why Consider Comps?

Before you make any investment, it’s essential to be armed with the right kind of information. Knowing things like EBITDA, pre-and post-cash values, and multiples can help you analyze how successful your deal could be and uncover exit opportunities when the time comes to maximize returns on your money. Looking at similar companies in different sectors gives more insight than just examining public stocks – so dig deep before investing!

How Do I Perform a Private Comps Analysis?  

The method of performing a private comps analysis is straightforward. This analysis should be conducted before making or accepting an offer to acquire or sell a company – most often, the analysis should be conducted with professional support. Here are the steps generally taken when considering private comps:

1. Evaluate the Target 

Whether you are a buyer or seller, the first step is to evaluate the practice to be bought or sold from a high level. This analysis will deepen your understanding of the practice and prepare you to have an upper hand in negotiations. In your evaluation, consider the factors and attributes of the practice, including: 

  • Practice type
  • Location
  • Revenues 
  • Staffing 
  • Marketing 
  • Profitability 
  • Owner readiness
  • Payor Mix

2. Evaluate Recent Sales

The next step is to find sales information. This can be tricky as private practice sales comparables are generally not published. Start by reviewing trade publications, articles, broker listings and boastings about sales and valuations obtained, and review offers on similar practices. In addition, you will want to consider these factors: 

  • Practice type 
  • Practice size 
  • Growth opportunity 
  • Demographics 
  • Transaction date 
  • Acquiror
  • Economic environment on transaction date 

3. Comparable Analysis

The final step is to compare the target practice with the valuation of similarly situated practices that have been sold recently. This requires an objective comparison of the data to determine a reasonable range at which the target can be acquired or sold. Critical to this process is understanding that the fair market value or an acceptable purchase/sale price for a practice falls within a range rather than being a fixed number. Depending on the intrinsic value of the practice to the seller or buyer, an acceptable price should fall within the range of acceptable values. A detailed discussion of intrinsic value is beyond the scope of this post, but is incredibly important to understand when evaluating a practice acquisition or sale. 

Comps Advice with Wood & Morgan 

At Wood & Morgan, we offer help at any step of the way. Our experienced dental lawyers have deep experience with practice transitions and were engaged on no less than 110 transitions in 2022. Wood and Morgan has also represented over 8,500 dentists since 1984 and focuses its efforts on supporting the dental community with their business needs. Contact us today for guidance at 800-499-1474.