Volume 13: It Pays to Invest in Your Tangible Assets

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We are often asked to value practices with old old equipment (25 to 35 years) but with a steady patient base of 500 to 1000 patients. The doctor does not see the equipment as old because he has aged with the equipment. Part of owning and managing a dental practice is keeping the practice appearance up to patients' expectations - reinvest in your practice! In a sale situation, seldom are purchasers excited to see equipment older than themselves.

A comfortable ratio of "goodwill", as a percentage of the sale price, is about 60%. If Goodwill is 70 or 75% of the total sale price this means that the equipment, leaseholds and supplies are only 25 to 30% of the value. The purchaser would be concerned about the additional cost of new equipment and leaseholds on top of the cost of the practice. Although the practice is making a good income, the value of the practice is going to be limited since there is a limit to the value of a chart; the equipment is not adding its fair share to the total value of the practice.

A good guideline is: the current market value of the equipment, leaseholds and supplies should be about 25% of the practices gross billing for the year. So, if billings are $600,000 then one would expect the fair market value of the tangible assets of the practice to be worth about $150,000.

Assets below this figure, say $80,000, would mean that since a reasonable value for the practice, at 75% of gross billings, would be $450,000, this leaves (450,000 - 80,000) $370,000 in Goodwill which predominately represents patients. At an average billing of $500.00 per chart that would indicate 1,200 charts. Therefore each chart is worth ($370,000 for Goodwill/ 1200 charts) $308.33 per chart. This is noticeably above average or to put it another way, the practice is going to be worth less than $450,000; it will be harder to sell, since the purchaser would be thinking of the additional costs, to improve the leaseholds and equipment, after he or she has purchased the practice.

Around 25% of gross billings, in a mature practice, indicates that the dentist has kept the practice equipment “up-to-date”. One can also go overboard in the other direction, too many assets for the level of production. This does not leave enough room for Goodwill thus limiting the value of a chart.

I recently recommended that a vendor take some of his major equipment with him as there was not enough net earning to carry the level of assets in the practice. New practices tend to fall in this area as the billings are too low to support even reasonable assets.

I prefer to see a "balanced practice" with contemporary assets, controlled costs, reasonable billings per patient and one that is clean and visually appealing. This makes an attractive proposition for a purchaser.

The Professional Advisory

  1. One Year Later

  2. Dealing with Unsolicited Offers

  3. Covid-19 Practice Sales Update

  4. When is the Right Time to Sell Your Practice and Why?

  5. Partnership Pitfalls

  6. The Real Cost of a Dental Practice Set-up

  7. Smaller Practice Realities

  8. Dental Market Update - 2019

  9. Creating Your Own Most Valuable Practice (MVP)

  10. Small Practice Economics

  11. The Market is Very Efficient

  12. How Can Dental Practice Values be Rising and Declining?

  13. Hygiene as a Value Driver

  14. The Value of a Good Team

  15. Is it Time to Move?

  16. Staging A Dental Practice

  17. The High Cost of Dying

  18. Deal-Busters

  19. Patients - Attract and Retain

  20. Should I Stay or Should I Go?

  21. Is There a Buyer for Every Practice?

  22. Good, Better, Best - The Market has Spoken

  23. Smooth-Sale-ing

  24. Buying Time

  25. Patients, Patience, Patients

  26. A Real Patient

  27. Why Do a Practice Valuation? I'm not Selling

  28. Irrational Exuberance or The New Normal?

  29. Do dental equipment and dental technology affect a practice value?

  30. Finding and Being a Mentor

  31. Bigger is Better

  32. Dave's Top Ten List for Buyers (Vendors should read this too!)

  33. How Well Do You Know Your Practice?

  34. Dave's Top Ten List for Vendors

  35. What will happen to dental practice Values in the next 10 years?

  36. Your Premises Lease is an Important Asset

  37. What are Associates Thinking?

  38. There is Life Outside the GTA

  39. When Is the Right Time to Sell My Dental Practice?

  40. Mergers are a Viable Option

  41. Is Your Associate an Asset or a Liability?

  42. Has your Practice Facility Kept Up With Your Billings?

  43. The 100 per cent of Gross Myth

  44. The Past, The Present and The Future

  45. Caveat Emptor

  46. Overpaid Long Term Staff

  47. Selling your Practice in Stages

  48. A Potential Pitfall of Selling Shares

  49. Value in Your Practice Through Balance

  50. Only Trusted Staff Can Defraud You

  51. To Own or Not to Own Practice Real Estate? That is the Question.

  52. Coping With A Large Patient Base

  53. Successful Dental Practice Transitions

  54. Taking Care of Business

  55. The Investing Dentist Phenomenon

  56. Two areas to focus upon that could negatively impact the value of your practice

  57. Organize your Debt in Order to Sell your Practice

  58. Having a Better Team

  59. How Do I Prepare My Practice For Sale

  60. How Do I Prepare My Practice For Sale? Part 3

  61. How Do I Prepare My Practice For Sale? Part 2

  62. How Do I Prepare My Practice For Sale? Part 1

  63. Advice to My Son or Daughter Graduating from Dental School

  64. Transition - What to Expect

  65. Discussion on Digital X-Rays

  66. Partnerships and Shotguns

  67. Strategic Planning - How to Get Started

  68. Calling All Vendors - Practices have Gone Up in Value

  69. Purchasers: Expect to Pay More for a Practice because of Lower Professional Corporation Tax Rates

  70. Matrimonial Practice Valuations

  71. Purchaser's Guide to Affording a Practice

  72. Location Improvements Throughout Your Career

  73. Small Practice Valuations

  74. Partnerships – The Best and The Worst

  75. Changing Location When the Opportunity Comes Along

  76. Visual Presentation of Your Practice

  77. Presentation of Charts

  78. Your Premises Lease Can Be Your Worst Enemy

  79. How to Select an Appraiser for Your Practice

  80. How Are Your Billing Ratios?

  81. It Pays to Invest in Your Tangible Assets

  82. The Importance of Separate Financial Statements

  83. Five Time Frame Levels to Sell a Practice

  84. 12 Suggestions to Safeguard Computer Data

  85. How to Buy a Visible Practice

  86. Why is there a shortage of good practices today?

  87. The Importance of Equipment in the Purchase of a Practice

  88. The Balanced Practice

  89. Will My Practice Be Saleable in The Future?

  90. Buyer Be Aware

  91. Excess Profit - The Second Key

  92. Patients and Profits are the Keys

  93. Plan Ahead