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- Dental Practice Valuations: Basic Facts Dentists Need to Know Part One
Dental Practice Valuations: Basic Facts Dentists Need to Know Part One
This month’s guest article is written by none other than Graham Middleton, former co-director of Synstrat Group. The Group specialises in providing strategic business advice, accounting, practice performance benchmarking, practice valuations, financial advice, superannuation fund advice and administration to professional clients, among whom dentists and dental specialists were the most numerous.
I asked Graham to provide an insight into some of the pitfalls faced by dentists wishing to sell their practices or purchase a practice for the first time.
The following is a thumbnail of some of his vast knowledge on the subject, broken into two parts.
All other things being equal:
- The most successful general dentist practices have one, two or three surgeries, with a practice principal being the highest producer of fees. In the case of practices with two associated owners, four surgeries is the optimum maximum number, with as much dentistry as possible done in the owner’s surgeries. Beyond three surgeries, two occupied by employed or contracted dentists, dental therapists or hygienists, a dental owner spends too much time supervising other dentists, dealing with treatments beyond their expertise and spending additional time on practice administration. It is invariably the case that tightening up appointments in employee surgeries and insisting that they work full sessions is far more beneficial than undertaking the additional cost of adding and fitting out a fourth surgery.
- Practice managers are profit sinks rather than creators of new business. Besides a courtesy title for a receptionist, practice managers are profit and practice value destroyers. The most successful practices use a visiting bookkeeper for a few hours per fortnight, who updates accounts and wages, reconciles the bank account and presents the practice principal with a list of accounts to pay for the approval. A full-time practice manager’s wage, including leave accrual plus superannuation plus work cover/workers’ compensation insurance, typically costs $100,000 per year, vastly more than a visiting bookkeeper. The extra cost reduces profit and substantially lowers practice value when selling a practice.
Dental specialist practices value varies according to the number of potential buyers in each specialty.
- Overly specialised general practices will have fewer potential buyers as the dentists capable of carrying on the treatment mix is limited. This materially impacts value. Orthodontists have greater resale value than specialties with many fewer practitioners. In extreme cases, a practice restricted to particular treatments, typically the province of a specialist will have negligible appeal to buyers. By contrast, practices where a relatively experienced buyer can replicate all the treatments provided has the widest possible number of potential buyers and will be worth more than the specialised practice.
- Buyers prefer practices located in established suburbs of major cities near quality housing and with private and public education choices readily accessible. New growth areas on the city fringes are less desirable. They have a higher proportion of young families struggling with mortgages. Next, after capital cities are regional centres and large towns within reasonable distances of capital cities and offering multiple education alternatives. Practices close to the coast are favoured over practices a significant distance inland.
- Practices in small remote towns have little market appeal and can be extremely difficult to sell. They may have little value.
- Many years of examining the actual financials of many dentists indicated that practices with hygienists/therapists were no more profitable than practices without. Some owners prefer to have them so they can have a greater personal choice over the treatment options they perform.
- Maintaining dental premises to a professional standard is vital for new referrals. Buyers look back over the rate of new referrals.
- If two practices have equivalent fees and profit and are located in equivalent locations, the practice with fees increasing at a greater rate is worth more than one, and the new patient referral rate is declining. Buyers look back through financial years to establish referral patterns.
- They have satisfactory premises for purchase or long-term affordable lease. It is vital to the sale of a practice. Suppose it is necessary for a buyer to obtain new premises and undertake expensive new fit-out and meet relocation expenses. In that case, there may be little value in the practice of goodwill.
- I observed over 33 years spent dealing with large numbers of dentists that the most consistent and profitable practices were NOT preferred providers to health funds.
- In recent years, dental corporates have learned from past acquisition mistakes and limited their purchases to practices with at least two employee dentists plus an owner who is prepared to agree to a three-year earn-out contract built into the sale. In the past, some acquisitions with high-performing dentists with many specialised treatment plans experienced a sharp reduction in fees when the former owner retired.
- Practices inside major shopping centres usually have punitive rents, which amount to several times the profession-wide average rental cost as a percentage of fees. They may also have punitive tenancy restrictions. They usually struggle to make a profit over and above the principal’s pay to work in another practice. Some are unsaleable, and the only option a practice owner has is to close the practice referring patients to a colleague with a practice located away from the shopping centre.
All businesses are not alike.
- Beware of uninformed accounting advice when purchasing. The only dentist that many accountants know is one who drilled their teeth. If seeking advice from an accountant about dental practice purchase, demand to know how many dentists they provide accounting services to and how many dental practices they have valued. Test them by asking questions to which you know the answer.
To continue reading, please click here for part two in this series
