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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 45: Value in Your Practice Through Balance

Download the PDF version now!

A few issues back in Issue 41 of The Professional Advisory I described some of the value drivers in a dental practice and concluded that “Patients and Profit make Value”. And that is certainly true. However, the value of any practice is enhanced if it is in balance. In this article I will explain how balance works to create value in your practice. The dictionary defines balance as “a state in which various parts form a satisfying and harmonious whole and nothing is out of proportion or unduly emphasized at the expense of the rest”. In your practice you should try to achieve balance in the following areas:

  • Gross billings : Patient

This ratio is important because it reveals a lot about the practice. Is there work to do? Do patients accept your case presentations? Are you providing comprehensive dentistry? Are you able to meet the demand for your services? In this category we like to see the amount in the $500/Patient range. It is hard to reproduce if you are significantly above that level so any variance should be below that level.

  • Assets : Gross Billings

If you want to sell your practice for a million dollars it has to look like a million dollars. That does not mean you have to spend a million dollars on your equipment and leasehold improvements but you really need to keep this in balance. If you have too little invested in your facility your practice value will suffer as in the example Practice 1, below. Conversely, if you overspend on assets you will end up eroding the goodwill value because market value first goes to assets and then to goodwill. If you are in balance you maximize your overall return.

  • Goodwill : Total Value

As I illustrated in the assets: billings ratio of $500/Patient, goodwill is what is left of market value after deducting the value of your assets. Please note goodwill is measured against total value as opposed to assets that are measured against total billings.

  • Gross Billings : Hygiene Billings

The hygiene ratio indicates how well managed your recall program is along with how your patients accept your (or your hygienist’s) recommended recall frequency. Additionally, a strong hygiene program is generally viewed as a way to enhance productivity in the restorative side of the practice. It also contributes bottom line profit with minimal time invested by the dentist. Dental Practice Investors place a real emphasis on strong hygiene production for good reason.

  • Top 4 Expense percentages (Staff, Lab, Supplies, Rent)

Industry averages are 25.2 per cent for staff, 6.5 per cent for rent and 6.8 per cent for supplies. It would generally be said that the lower the better applies for these three expense items. Lab is a flow through expense that is an indicator of how much crown and bridge work is being done in the practice – therefore a low number is not generally the goal. Also with lab, if you are much higher than the

industry average of 7.9 per cent, it may be reasonable to conclude that much of the crown and bridge work in the practice is already done. Here again, balance is the key.

 Examples of Balance

 
Practice 1
Practice 2
Target
Gross Billings
$1,012,000
$1,048,000
 
Billings : Active Patient
$613
$265
 $500
Assets : Billings
15%
21%
25%
Goodwill : Total Value
83%
82%
78%
Gross : Hygiene Billings
45%
32%
>30%
Top 4 Expense %
39%
32%
<46%
Practice Value
$867,000
$1,347,000
 
Value as a percent of Gross
86%
129%
 

These examples illustrate how the numbers work together to create value. In Practice One, if the dentist had invested in assets at the target amount of 25 per cent it would have enhanced the value by over $100,000 with more enjoyment working in a modern updated facility. In Practice Two, the dentist enjoys good value relative to the gross; however the per patient production is low so there is no benefit from a strong hygiene or restorative program. Value would be enhanced further by balancing this ratio.

Most dentists do not have enough statistical data at their fingertips to determine these ratios. If you do not, a Valuation of your practice will reveal where you stand in all of these critical areas. If you don’t have the information available, compare your practice to the two actual examples above and to the target to see how balanced your practice is.

David Lind is a Principal in Professional Practice Sales Ltd. (www.ppsales.com), which specializes in the valuation and sale of dental practices. He can be reached at (905) 472-6000 or 1-888-777-8825 or e-mail at: david.lind@ppsales.com

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