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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 51: The 100 per cent of Gross Myth

Download the PDF version now!

 

Many practices sell for 100 per cent of the last year’s gross revenue. That is an undeniable fact but it does not mean that all practices sell for 100 per cent of gross revenue and it does not mean that your practice or the practice you are looking at buying is worth 100 per cent of gross revenue. It may be worth more or it may be worth less than that. Sometimes much more or less.
 
We get asked regularly, by buyers, sellers and dentists that are just curious about what their practice might be worth to explain what their practice or the practice they are considering purchasing is worth and why. Regular readers of The Professional Advisory will remember that Patients and Profit create value. It is obvious that the higher your active patient count the more you will get for your practice but there is more to it than that. We use the example that a practice that generates $1 million of gross revenue with 2,000 active patients is worth much more than a practice that generates $1 million of gross revenue with 1,000 patients. Patient factors that buyers consider are; billings per patient, new patient flow, age demographic, socio-economic status, ethnicity, insurance coverage and dental I.Q. Practices that have all of these factors in balance will sell for a premium compared to those practices that have one or more of these factors out of balance. Similarly, practices that have higher profit margins will sell for a premium compared to less profitable practices. Using our sample $1 million dollar grossing practice, a profit margin of $200,000, after deducting an owner “salary” of forty per cent of professional billings will be worth much more that the same practice that generates $100,000 of profit.
 
The other factors that contribute to value are;
  1. Staff. Think about your staff as a buyer would. They are going to be an important link to your patients after you are gone. Are they all the best people you can find? Are they trained and motivated to do their best? Will they stay after you are gone? Do you have employment contracts with them? If you have the extra “floater” person, consider right-sizing before you sell. Associates and hygienists are also a factor and their impact on your practice will be examined in detail in a future article.
  2. The Premises Lease. You should have at least seven years remaining between the existing term and renewal options. The rental amount should be at current market rates and the size of your suite should be appropriate for the size of your practice. It is acceptable to have a little extra room for future growth but not double the space you actually need. Your rent should equal about 6.5 per cent of your gross. If you own you own building, it should carry for about the same percentage.
  3. Physical Plant and Equipment. Your practice is a reflection of you and buyers will draw conclusions about the practice from the state of the office 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 per cent of your billings. Many people fail to take this into consideration when thinking about what their practice is worth.
  4. Other factors. Cost-share or partnership interests will sell for less than solo practices. Practices with strong hygiene programs will get a premium compared to those practices with weaker hygiene production or dentists that do their own hygiene. Invisible locations sell for less than main floor locations with good signage and visibility. Big city practices are in higher demand so they will get a premium to smaller town practices. 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 100 per cent myth is just that, a myth. You must consider all of the value drivers in a dental practice before you can determine the true value. If your practice or the practice you are considering purchasing is well balanced and the factors I have mentioned above are understood and analyzed, the myth may become reality.
 
 
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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