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Squat, Existing Practice, or Corporate Buyout?

Squat or Existing Practice

Demand for dental practices in Australia is at an all-time high. This, in part, is leading to increasing numbers of dentists wishing to set up a squat dental practice as an alternative to buying an existing practice.

Setting up a squat is a viable way to get into practice ownership. It would help if you created a plan of what your dental practice will become and, with this, a financial forecast so you can be comfortable with the necessary investment required. It would be best if you also were confident you could convince your lenders you know what you are doing.

There is no doubt the idea to create your vision from the ground up is exciting. You get to design everything from the layout, equipment, and services offered and create the culture to drive the patient experience.

Still, buying an existing dental practice requires a very different approach and, in most cases, offers more comfort to your lenders, instant revenue, patient base, existing staff, to name just a few advantages.

BUT that’s only the beginning!

Ninety per cent of the dentists who contact me intend to buy a practice or create a squat, work within a corporate environment or part-time between a few clinics and have no exposure to managing staff or the practice itself. In most cases, they are referred to our panel of lenders to request pre-approval before going any further.

Interestingly, most don’t get back in touch until they have a little more experience behind them at the pointy end, which can be two-three years later.

On the other hand, associate dentists who work in private practices are more likely to be offered a partnership of some kind if they show loyalty and carry the correct skillset. The lenders have more comfort knowing they have been exposed to a more rounded work environment, including managing day to day activities and staff management.

Valuation myths

There seems to be a common Myth that all practices have a similar value a multiple of EBITDA.

EBITDA =             Earnings Before Interest, Taxes, Depreciation, and Amortisation

  • E =             net income
  • I =              interest
  • T =             taxes
  • D =            depreciation
  • A =            amortisation

I am not sure why there is so much emphasis placed on EBITDA, but it’s not the only part of the valuation formula.

To value a business; like a dental practice, one needs to take into account many other factors, as I have mentioned in the past see link including:

Staff, employment contracts, associates and hygienists, premises leases, terms and rental amounts, practice size, 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? How long is the exiting principal prepared to stay and so on?

Once all of the related factors have been analysed, then you can accurately make an informed assumption about that particular practice value which needn’t be a straight multiple of EBITDA as commonly believed?

Corporate Buyouts

If you’re thinking about selling to a corporate DSO (Dental Service Organization). Selling to a corporate DSO means:

  • Death to your autonomy,
  • Using their vendors for equipment, supplies, and services,
  • Four-Five years of indentured servitude working for a corporate overlord,
  • Putting your dream of retirement (or your next venture) on hold,
  • Taking on hidden risks and maybe not getting your full payout,
  • Agreeing to a deal where you have zero control, and
  • No longer putting your patients first.

It doesn’t have to be like this. As mentioned above, the gap between what the DSO offers and private sales has narrowed based on each individual practice. It’s all in preparation.

In most cases, For dentists who want to enjoy a stress-free few years before retirement, the promise of a healthy payout is slim to none. You’ll get an offer under the DSO valuation model based on the last couple of years’ revenues. It is usually a multiple of EBITDA plus the “privilege” of working for these corporate investors to earn your full buyout. But that rarely goes as planned.

I have been privy to many cases where the principal hasn’t endured the buyout period and has been forced to walk away from the promised full buyout payment.

It’s not rocket science to understand they gear this process to overvalue your practice by at least the withheld buyout amount, knowing you will need to perform like never before to achieve the final result, “THAT IS HOW THIS WORKS”! You are better to take a little less privately to get a whole lot more in the long run.

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.

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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