Formal Valuation vs. Market Price: What’s the Difference?

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When discussing the worth of a dental practice, you may use the terms, “valuation” or “price,” interchangeably. However, in a dental transition, they’re not one in the same and actually have two distinct meanings.

“Both formal valuations and market price aim to determine the worth of an asset, which can lead to the misconception that they are the same,” Valuation Analyst Grace Martinez said. “While they both relate to the value of assets, they serve different purposes and are derived from different methodologies.”

When it’s time to determine the worth of a practice for a dental transition, knowing if you need a formal valuation or simply an analysis to pinpoint the market price isn’t always cut and dry. To determine which one you may need, it’s a matter of understanding the practice, transition plan and the parties’ goals.

Here are the differences between valuation and market price and why you would need one or the other in a dental transition.

Formal Valuation

A formal valuation is when a Certified Valuation Analyst will take a deep dive into the practice’s current and historical financial position, operational results and the profitability and risk factors. Typically, four years of financials are reviewed to identify trends such as growth, decline or stability in the practice.

This rigorous analysis results in a formal detailed report that represents an opinion of value and follows valuation standards, which are governed by the National Association of Certified Valuators and Analysts.

It’s important to note that with a formal valuation, the value of the practice is defined only at a specific point in time. Therefore, a valuation that was prepared a few months or years ago may not reflect the true current value of the practice if the practice financials have changed.

NDP’s Certified Valuation Analysts have extensive experience in conducting dental valuations and providing diligence for the life’s work of a practice owner.

Market Price

The market price is simply the amount of money for which the practice can be bought or sold. This price can be equivalent to a value presented in a valuation, or this could be a different number based on the specifics of the transition. 

To determine the market price for a dental transition, a detailed financial analysis is performed. This financial analysis uses the same analysis model as a formal valuation, but it allows flexibility to adjust for any uniqueness or change in the market or practice. Additionally, the analysis does not have to follow a governed set of standards.

The result of the financial analysis is a more concise deliverable than a valuation. Instead of a formal report, the outcome is simply a suggested market price based on the financial and operational information of the practice. Similar to a valuation, NDP’s advisors can complete a financial analysis for you.

“Sometimes the market can influence a formal valuation and vice versa, especially in a market where recent sales data is used for valuations or a practice has been very consistent over time,” Grace said.

When do you need a formal valuation versus a detailed financial analysis?

Dental valuations are most often used in a partnership sale where a future valuation method needs to be documented. This is helpful for future buyouts so that the owners understand the format of the previous sales. Valuations may also be desired if the seller and/or buyer want a formal product as a starting point for negotiations. Note that in dental-specific transactions, a formal valuation is rarely legally required by a lender or for transaction purposes. 

A detailed financial analysis is typically used if you need more flexibility in your analysis, or your situation is unique. For example, if the practice is a start-up, a new location just opened, the seller recently brought on a new doctor, or several changes have taken place in the past 18 months, a financial analysis may be more suitable for you. Also, if the transition involves selling 100% of the practice, a detailed financial analysis to set the market price is often all that’s needed.

The bottom line is that there isn’t an overall “better” choice of the two, and a financial analysis is not an inferior product to a valuation or vice versa. They both have the same foundational base in their analysis, but some practice transitions may need a valuation, while others may simply need the market price. NDP can help you determine which option best fits your situation.

Determining the story behind the numbers

At NDP, not only are we invested in understanding the numbers, but we also strive to understand your personal and professional goals. We help make sense of the numbers and learn the practice’s story to ultimately guide you towards the right path for you.

Our team of Certified Valuation Analysts and Certified Public Accountants not only offer valuation services, but can also help determine the practice’s market price through our listing and seller consulting services. Contact us to learn more about how NDP can help you.