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Articles

The Professional Advisory

  1. Is it Time to Move?
  2. Staging A Dental Practice
  3. The High Cost of Dying
  4. Deal-Busters
  5. Patients - Attract and Retain
  6. Should I Stay or Should I Go?
  7. Is There a Buyer for Every Practice?
  8. Good, Better, Best - The Market has Spoken
  9. Smooth-Sale-ing
  10. Buying Time
  11. Patients, Patience, Patients
  12. A Real Patient
  13. Why Do a Practice Valuation? I'm not Selling
  14. Irrational Exuberance or The New Normal?
  15. Do dental equipment and dental technology affect a practice value?
  16. Finding and Being a Mentor
  17. Bigger is Better
  18. Daves Top Ten List for Buyers (Vendors should read this too!)
  19. How Well Do You Know Your Practice?
  20. Dave
  21. What will happen to dental practice Values in the next 10 years?
  22. Your Premises Lease is an Important Asset
  23. What are Associates Thinking?
  24. There is Life Outside the GTA
  25. When Is the Right Time to Sell My Dental Practice?
  26. Mergers are a Viable Option
  27. Is Your Associate an Asset or a Liability?
  28. Has your Practice Facility Kept Up With Your Billings?
  29. The 100 per cent of Gross Myth
  30. The Past, The Present and The Future
  31. Caveat Emptor
  32. Overpaid Long Term Staff
  33. Selling your Practice in Stages
  34. A Potential Pitfall of Selling Shares
  35. Value in Your Practice Through Balance
  36. Only Trusted Staff Can Defraud You
  37. To Own or Not to Own Practice Real Estate? That is the Question.
  38. Coping With A Large Patient Base
  39. Successful Dental Practice Transitions
  40. Taking Care of Business
  41. The Investing Dentist Phenomenon
  42. Two areas to focus upon that could negatively impact the value of your practice
  43. Organize your Debt in Order to Sell your Practice
  44. Having a Better Team
  45. How Do I Prepare My Practice For Sale
  46. How Do I Prepare My Practice For Sale? Part 3
  47. How Do I Prepare My Practice For Sale? Part 2
  48. How Do I Prepare My Practice For Sale? Part 1
  49. Advice to My Son or Daughter Graduating from Dental School
  50. Transition - What to Expect
  51. Discussion on Digital X-Rays
  52. Partnerships and Shotguns
  53. Strategic Planning - How to Get Started
  54. Calling All Vendors - Practices have Gone Up in Value
  55. Purchasers: Expect to Pay More for a Practice because of Lower Professional Corporation Tax Rates
  56. Matrimonial Practice Valuations
  57. Purchaser's Guide to Affording a Practice
  58. Location Improvements Throughout Your Career
  59. Small Practice Valuations
  60. Partnerships – The Best and The Worst
  61. Changing Location When the Opportunity Comes Along
  62. Visual Presentation of Your Practice
  63. Presentation of Charts
  64. Your Premises Lease Can Be Your Worst Enemy
  65. How to Select an Appraiser for Your Practice
  66. How Are Your Billing Ratios?
  67. It Pays to Invest in Your Tangible Assets
  68. The Importance of Separate Financial Statements
  69. Five Time Frame Levels to Sell a Practice
  70. 12 Suggestions to Safeguard Computer Data
  71. How to Buy a Visible Practice
  72. Why is there a shortage of good practices today?
  73. The Importance of Equipment in the Purchase of a Practice
  74. The Balanced Practice
  75. Will My Practice Be Saleable in The Future?
  76. Buyer Be Aware
  77. Excess Profit - The Second Key
  78. Patients and Profits are the Keys
  79. Plan Ahead

Volume 23: A Purchaser's Guide to Affording a Practice

Download the PDF version now!

The basic philosophy when purchasing a practice is that the practice should pay for itself within six to ten years. You should not have to use your personal dental earnings to finance it. Let’s take a look at how this works for the thriving practice you are looking at purchasing.

First, compute the Net Income before taxes from Ownership (see below) after all expenses. This includes paying yourself and your associates at a rate of 40% ($125,000) for treating your personal patients.

Net Income after expenses $228,844.
Payments to doctors @ 40% 125,000.
Net Income before taxes, from Ownership 103,844.
Taxes on the $103,844 36,000.
Net Income after taxes from Ownership $67,844.

Next compute the taxes on this ($103,844) income. To calculate the Taxes one can interpolate the following table to get close.

Net Income before Taxes Average tax rate
$25,000 25%
$75,000 30%
$100,000 33%
$150,000 33%
$225,000 41%
$300,000 41%

After deducting the taxes, there is $67,844 remaining to pay off the bank loan. If the interest rate is 5% and you wish to have the loan paid off in 7 years then, from the table below the factor is 16.961%. By dividing $67,844 by .16961 equals $400,000 which could well be the cost of the practice.

Interest Rate  Loan paid off in years
  6 years 7 years 8 years 10 years
5% 19.32% 16.961% 15.192% 12.728%
6% 19.887% 17.530% 15.770% 13.322%
7% 20.459% 18.111% 16.360% 13.933%

In the opposite direction, when you borrow $400,000 at five per cent to purchase your practice in seven years then the Net Income after Tax from Ownership should be 16.961% of $400,000 or $67,844 per annum

Your accountant may fine tune these calculations to reflect that:

  1. You will produce more or less billings than the vendor
  2. The interest portion can be calculated as a pre-tax expense
  3. Your expenses may be more or less than the vendor

If the practice Net Income after Tax from Ownership is only 10% of the selling price then the formula would calculate – given the same income and expenses – a payout of over 15 years. That is a long time. The practice may be overvalued.

Remember, if the practice is underachieving, then one must make allowances for additional billing. Your accountant would be able to calculate a pro-forma for future production that could be greater than currently being experienced by the vendor. This additional billing should give rise to additional Net Income after Taxes from Ownership that would cause the value to increase making the practice worth more due to the reduced risk of purchasing.

New practices with new equipment and prime location fall outside the above calculations due to the durability of the new assets. Little new equipment would have to be purchased while you were paying off the loan to purchase the practice.

Similarly, older practices with poor equipment and leaseholds fall outside because there in more money to put into the practice the replace the older equipment and leaseholds while you are trying to pay off the practice purchase loan. By older I do not mean ten or twelve years old, I mean twenty five or thirty five year old equipment.

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