Volume 23: A Purchaser's Guide to Affording a Practice
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|
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|
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|
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:
- You will produce more or less billings than the vendor
- The interest portion can be calculated as a pre-tax expense
- 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
- One Year Later
- Dealing with Unsolicited Offers
- Covid-19 Practice Sales Update
- When is the Right Time to Sell Your Practice and Why?
- Partnership Pitfalls
- The Real Cost of a Dental Practice Set-up
- Smaller Practice Realities
- Dental Market Update - 2019
- Creating Your Own Most Valuable Practice (MVP)
- Small Practice Economics
- The Market is Very Efficient
- How Can Dental Practice Values be Rising and Declining?
- Hygiene as a Value Driver
- The Value of a Good Team
- Is it Time to Move?
- Staging A Dental Practice
- The High Cost of Dying
- Patients - Attract and Retain
- Should I Stay or Should I Go?
- Is There a Buyer for Every Practice?
- Good, Better, Best - The Market has Spoken
- Buying Time
- Patients, Patience, Patients
- A Real Patient
- Why Do a Practice Valuation? I'm not Selling
- Irrational Exuberance or The New Normal?
- Do dental equipment and dental technology affect a practice value?
- Finding and Being a Mentor
- Bigger is Better
- Dave's Top Ten List for Buyers (Vendors should read this too!)
- How Well Do You Know Your Practice?
- Dave's Top Ten List for Vendors
- What will happen to dental practice Values in the next 10 years?
- Your Premises Lease is an Important Asset
- What are Associates Thinking?
- There is Life Outside the GTA
- When Is the Right Time to Sell My Dental Practice?
- Mergers are a Viable Option
- Is Your Associate an Asset or a Liability?
- Has your Practice Facility Kept Up With Your Billings?
- The 100 per cent of Gross Myth
- The Past, The Present and The Future
- Caveat Emptor
- Overpaid Long Term Staff
- Selling your Practice in Stages
- A Potential Pitfall of Selling Shares
- Value in Your Practice Through Balance
- Only Trusted Staff Can Defraud You
- To Own or Not to Own Practice Real Estate? That is the Question.
- Coping With A Large Patient Base
- Successful Dental Practice Transitions
- Taking Care of Business
- The Investing Dentist Phenomenon
- Two areas to focus upon that could negatively impact the value of your practice
- Organize your Debt in Order to Sell your Practice
- Having a Better Team
- How Do I Prepare My Practice For Sale
- How Do I Prepare My Practice For Sale? Part 3
- How Do I Prepare My Practice For Sale? Part 2
- How Do I Prepare My Practice For Sale? Part 1
- Advice to My Son or Daughter Graduating from Dental School
- Transition - What to Expect
- Discussion on Digital X-Rays
- Partnerships and Shotguns
- Strategic Planning - How to Get Started
- Calling All Vendors - Practices have Gone Up in Value
- Purchasers: Expect to Pay More for a Practice because of Lower Professional Corporation Tax Rates
- Matrimonial Practice Valuations
- Purchaser's Guide to Affording a Practice
- Location Improvements Throughout Your Career
- Small Practice Valuations
- Partnerships – The Best and The Worst
- Changing Location When the Opportunity Comes Along
- Visual Presentation of Your Practice
- Presentation of Charts
- Your Premises Lease Can Be Your Worst Enemy
- How to Select an Appraiser for Your Practice
- How Are Your Billing Ratios?
- It Pays to Invest in Your Tangible Assets
- The Importance of Separate Financial Statements
- Five Time Frame Levels to Sell a Practice
- 12 Suggestions to Safeguard Computer Data
- How to Buy a Visible Practice
- Why is there a shortage of good practices today?
- The Importance of Equipment in the Purchase of a Practice
- The Balanced Practice
- Will My Practice Be Saleable in The Future?
- Buyer Be Aware
- Excess Profit - The Second Key
- Patients and Profits are the Keys
- Plan Ahead