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- Dental Practice Valuations: Basic Facts Dentists Need to Know Guest writer Graham Middleton Part two
Dental Practice Valuations: Basic Facts Dentists Need to Know Guest writer Graham Middleton Part two
Dental Practice Valuations: Basic Facts Dentists Need to Know Guest writer Graham Middleton Part two
Accountants’ Knowledge of Business Lacking!
Looking back a few years, the respective failures of corporatised and ASX-listed accounting groups Stockford Accounting, Harts Australasia and Knights Insolvency all ended in insolvency, proving that accountants mistake doing tax returns with the skills required to establish and run a corporatised accounting group successfully. Most accountants have very little knowledge as to what makes some of their clients’ businesses profitable on a sustained basis.
Do not confuse an accounting firm’s reputation with the business knowledge of individual accountants, including partners. Nobody else was in the field when I started valuing Australian vet practices. The best-known dental valuer was an equipment supplier who could not interpret financials. Over about 33 years, I dealt with a large number of accountants. I found that if professional clients, mainly veterinarians and dentists, were to receive proper business advice, I had to learn a great deal more about their practices and identify the features of successful practices and the mistakes of those who were unsuccessful because invariably their accountants lacked effective knowledge and were devoid of good business advice outside of telling them how much tax to pay. This led me to practice performance benchmarking and practice valuations.
Dental Buyers Hidden Value in Dental Fit Outs
There are two critical assessments when deciding whether to buy an existing dental practice or start one from scratch. First is the quantity of current dental fees, and second, the cost of fitting out and equipping a new practice. The second cost is usually underestimated, as is the time spent in planning, gaining approvals, and a myriad of smaller costs that usually had not been budgeted. While some equipment may be in imminent need of replacement, usually, there is a great deal that is serviceable, as is the hidden plumbing, wiring, airlines and dental cabinetry. Starting as a day, one owner with fees coming in an established telephone number, website, a location known to exist patients and time to do changes and upgrades in affordable steps has a great deal to recommend it.
Purchase of Established Profitable Dental Practices Offers Long Term Advantages Over Employment, Particularly for Well Performed Dentists with Good Interpersonal Skills
The dentist who buys a practice and conducts it roughly in line with the average DEBDIT percentage and steady but not unusual growth in patient numbers inevitably ends up much better off financially than dentists who spend their careers in corporate employment. The difference often amounts to millions of dollars of net worth by retirement.
- A practice owner makes more per dollar of fees earned in their own surgery than a dentist employed on a corporate contract.
- The practice owner builds up the goodwill value of their practice, which may be enhanced by employing other providers. The corporate employee does not.
- Many practice owners purchase their own premises and improve them over time, most achieving impressive capital growth over their period of ownership. The corporate employee lacks this opportunity.
- Many practice owners can employ a spouse within fairly generous ATO guidelines or, in many cases, share ownership with their spouse. The corporate employee/contractor cannot. They also make superannuation payments on behalf of their spouse and consequently usually have far bigger superannuation funds at retirement.
- At eventual sale for retirement, the dental practice goodwill and the premises usually fall within the parameters governing the small business capital gains tax concessions for the sale of active business assets. This is a significant advantage compared to the sale of non-active business investments.
- A practice owner has autonomy over streaming patients to their own surgery and the mix of dental work they choose to concentrate on. A corporate employee lacks this control.
The above offers significant reasons why corporate ownership of practices is much lower in Australia than in the USA.
When to Sell a Dental or Veterinary Practice
The time to sell is while practice is still growing. Dentists who wait too long and reduce their clinical days from four to three days per week show a marked decline in overall profit. Whether they have slowed down or their staff sense that their boss is losing interest, I have noticed over the years that where the principal of a two or three-chair practice reduces from five clinical days to four or four and a half days, their practice remains sound. Still, when they reduce to three clinical days per week, there is a large decline in practice profitability.
The Lesson
If a practice owner wants to cut their clinical involvement to three days per week, it is time to sell first and contract to work for the new owner to reduce clinical days.
A final word
I hope some of this information has been helpful to those in need of answers to these complicated questions.
Thank you, Graham, for allowing us to reprint some of your tips in the hope of helping some old and new friends
Kind regards
Jan Gray
Find a copy of Graham’s book here
For more on buying and selling practices, refer to the book “Financial Success for Dentists” and articles concerning buying and selling dental practices at https://www.grahammiddleton.com/.
Go to the Delany Foundation website at http://www.delanyfoundation.org.au/
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