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Articles

Volume 41: Successful Dental Practice Transitions

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Over the last several months I have been speaking at various Study Clubs and Dental Societies on the topic of Successful Dental Practice Transitions. This article condenses my presentation into a quick read of the current dental practice sales market and what you can do to be successful as a buyer or a seller.

The Drivers of Dental Practice Value.

You can probably quickly come up with statistics relating to your gross production, number of operatories, size of your office or the number of team members you have. All of that is important but these elements are minor contributors to value. You really should know how many active patients you have and what your adjusted net income is. The two main drivers of dental practice values are Patients and Profit. The absence of either of these factors makes your practice very difficult to sell. Some of the other factors that contribute to value are location, productivity, hygiene department, assignment, competition, overhead, and reproducibility of results.

Equipment and leasehold improvements are also factors buyers consider. They are in a different category though because they are easy to change. If a buyer doesn’t like your old equipment or dated decorating they can easily call their dental supply company or contractor and have them changed. Who do they call to order more patients?

The following actual examples illustrate how the real drivers of value work:

Practice

  • $1,300,000 Gross
  • 1000 Patients
  • Lab
  • $200K Hygiene
  • Professional Bldg-Midtown Toronto
  • $816,000 Gross cash flow
  • Non-assignment
  • 3ops-$90K assets
  • Value-$680,000/52% of Gross

Practice 2

  • $1,100,000 Gross
  • 2800 Patients
  • 6.4% Lab
  • $330K Hygiene
  • Professional Bldg- Mississauga
  • $645,000 Gross cash flow
  • Non-assignment
  • 6 ops-$390K assets
  • Value-$1,390,000/ 125% of Gross

As the examples show the biggest contributor to practice value is the patient count followed closely by profit. In Practice 1, the value is held back by the low patient count relative to the gross production even though the cash flow is strong. What would the outcome be if a buyer followed one of most misused rules of thumb and paid 80-90 per cent of gross for this practice?

In Practice 2, the value is enhanced by low productivity relative to the patient count coupled with stable, repeatable earnings. Imagine how much the vendor of Practice 2 might have left on the table if they didn’t know the true value of what they had.

In valuing dental practices all of the factors must be considered and the numbers analyzed against each other to produce a meaningful report. Nothing is more important than Patients and Profit.

Considerations for Sellers

It is best to begin planning for the sale of your practice well in advance. Ten years ahead is not too early but most people don’t plan that far ahead. If possible planning should begin at least five years before you sell. You should analyze the productivity of both the hygiene and dental departments. Both should be optimized prior to a sale.

Your premises lease is a key element in creating value. A buyer will not want to buy your practice if the tenancy is not secure for at least seven years. Further, the banks and finance companies will not finance the purchase of your practice without a good long term lease. Patient charts should be purged so that you have a limited number of inactive charts mixed in with your active charts. A professional valuation will give you insight into these and many other factors of your practice and can be an excellent start to making the necessary adjustments to ensure your practice is positioned in the best possible way.

Considerations for Buyers

First and foremost, don’t do this alone. Accountants, lawyers, consultants, bankers, and brokers, have all been through this many times. Employ them to help you make the right decision. Remember thatPatients and Profit make value so you should have complete confidence in the numbers you are reviewing in these two important areas. Review the valuation with your trusted advisors, and make sure you have a good understanding of the contained information. You should also take time to do your own chart audit. It is also important for patient retention that there are similarities between you and the vendor. For instance, if the vendor only uses amalgam for posterior restorations and you only use composite, this would be a problem.

Invest enough time to become educated on the market and understand what you want and what you don’t want. It may be very difficult to find the perfect practice so be prepared to compromise on the “nice to haves” while making sure you don’t forgo the “need to haves”. When you find the right practice, act swiftly.

Please feel free to contact me if you would like me to come to your Study Club or Dental Society meeting to do the full presentation on Successful Dental Practice Transitions.

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

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