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Myths Regarding Dental Practice Valuations

Lately, we have had contact from many dentists wishing to buy or sell a dental practice.

The scary part is the misconceptions from both sides regarding what practice may or may not be worth.

Here is some of the feedback from buyers:

• Practice is worth about 100% of the last three years gross fees generated
o Who said this would be correct? My Accountant!
• It’s worth about $150K per surgery plus $100K for the rest of the rooms.
o So 3 surgeries and the rest equals $500K regardless of fees generated?

It might be good to examine this subject a little more.

Over the last few years, many dental practices have been sold for upwards of 85% of the last year’s gross revenue. That’s a fact we can back up based on our own sales, but it does not mean all practices will achieve a sale price of 85% of gross revenue or more. It may be worth more or less depending on many other factors.

Many dentists who use the valuation tool on our website, curious about the value of their practice or buyers using the tool to figure  a rough esitmate of the practice value they might be trying to buy. But this tool is just a guide, nothing more!

Many factors make up the true value of a dental practice. Regular readers of this blog have heard the term “Best In Class” Preparation. If a practice is prepared for sale properly, you will achieve top dollars; it’s that simple!

Yet, so many principals don’t want to invest the time or a small amount of money to achieve a satisfactory result, I don’t get it!.

Imagine going into the BMW showroom to buy a new car; The showroom floor hasn’t been vacuumed; all the cars are dirty and covered in dust and grime. You open the door, and the smell is bad inside; the salesperson is scruffy. Would you buy one or go somewhere else?

Have you been to a new show home of late? They are professionally furnished, landscaped, have special fragrances through the air-con; they have selected mood music playing at a comfortable level. The salesperson is immaculately dressed, all in the name of the premium presentation.

Shouldn’t the practice you are selling or buying be presented in the same fashion? Then why are most not?

We are talking about an asset worth north of $400K -to over $2m.

There are many other factors to consider. Patients and profit create value. Obviously, the higher your active patient count, the more you will get for your practice, but there is more to it than that.
Let’s use the example of a practice generating $1m of fees with 1800 active patients is worth more than a practice generating $1m of fees with 1,000 patients, or is it?

Looking at the patient factors and consider billings per patient, new patient flow, age demographic, socio-economic status, ethnicity, insurance coverage and dental I.Q.

Practices with all of the above ticked and in balance will achieve top dollars compared to those practices that have one or more of these factors out of balance.
Obviously, practices with greater profit margins will sell for a higher price compared to less profitable practices.

Using the example, the $1m fees with a net profit of $200K after deducting an owner “salary” of 40 % of fees less lab costs will be worth more than the same practice generating $100,000 of net profit.

The other factors that contribute to value are;

Staff, employment contracts, associates and hygienists, premises leases, terms and rental amounts, practice size, and room for future growth, age of plant and equipment and condition. What is the depreciated value of the assets? When will they need to be replaced?

Your practice reflects you, and buyers will draw conclusions about the practice from the general state of the clinic and equipment. It does not have to be brand new or all high tech, but it should be clean, functional and fresh. The combined market value of equipment and leasehold improvements should be 25 % of your billings. Many people fail to take this into consideration when thinking about what their practice is worth.

Other factors. Cost-share or partnership interests sell for less than solo practices. Practices with strong hygiene programs will get a premium compared to those with weaker hygiene production or dentists doing their own hygiene. Invisible locations sell for less than main floor locations with good signage and visibility. Major city practices are in higher demand, as are preferred provider practices. Still, they don’t necessarily achieve greater value due to competition and other factors.

Smaller practices will sell for less (relative to their gross) than larger practices. Dentists with multi-locations in the same area will receive less than single owner-operated practices. Retiring dentists will get a premium to those who are serial buyer/sellers.

In summary, the 80% myth is just that, a myth. You must consider all of the value drivers in a dental practice before determining the true value. Suppose your practice or the practice you are considering purchasing is well balanced. The factors I have mentioned above are understood and analyzed. In that case, the myth may become a reality.

As a Bstar Alliance Partner Program member and with over 350 accounting firms in Australia using benchmarking, we use the largest and most accurate valuation benchmarks databases to validate our value assessment and identify future value improvement opportunities.

Compliance Our valuation processes, systems, and reports comply with international accounting valuation standards and regulatory requirements.

Value Improvement Solutions We also offer tailored support to help you grow the value of your dental practice.

We offer a range of business valuation services to determine the true value of your Dental practice and pinpoint areas for value improvement.

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