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

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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.

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