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Articles

Volume 45: Value in Your Practice Through Balance

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A few issues back in Issue 41 of The Professional Advisory I described some of the value drivers in a dental practice and concluded that “Patients and Profit make Value”. And that is certainly true. However, the value of any practice is enhanced if it is in balance. In this article I will explain how balance works to create value in your practice. The dictionary defines balance as “a state in which various parts form a satisfying and harmonious whole and nothing is out of proportion or unduly emphasized at the expense of the rest”. In your practice you should try to achieve balance in the following areas:

  • Gross billings : Patient

This ratio is important because it reveals a lot about the practice. Is there work to do? Do patients accept your case presentations? Are you providing comprehensive dentistry? Are you able to meet the demand for your services? In this category we like to see the amount in the $500/Patient range. It is hard to reproduce if you are significantly above that level so any variance should be below that level.

  • Assets : Gross Billings

If you want to sell your practice for a million dollars it has to look like a million dollars. That does not mean you have to spend a million dollars on your equipment and leasehold improvements but you really need to keep this in balance. If you have too little invested in your facility your practice value will suffer as in the example Practice 1, below. Conversely, if you overspend on assets you will end up eroding the goodwill value because market value first goes to assets and then to goodwill. If you are in balance you maximize your overall return.

  • Goodwill : Total Value

As I illustrated in the assets: billings ratio of $500/Patient, goodwill is what is left of market value after deducting the value of your assets. Please note goodwill is measured against total value as opposed to assets that are measured against total billings.

  • Gross Billings : Hygiene Billings

The hygiene ratio indicates how well managed your recall program is along with how your patients accept your (or your hygienist’s) recommended recall frequency. Additionally, a strong hygiene program is generally viewed as a way to enhance productivity in the restorative side of the practice. It also contributes bottom line profit with minimal time invested by the dentist. Dental Practice Investors place a real emphasis on strong hygiene production for good reason.

  • Top 4 Expense percentages (Staff, Lab, Supplies, Rent)

Industry averages are 25.2 per cent for staff, 6.5 per cent for rent and 6.8 per cent for supplies. It would generally be said that the lower the better applies for these three expense items. Lab is a flow through expense that is an indicator of how much crown and bridge work is being done in the practice – therefore a low number is not generally the goal. Also with lab, if you are much higher than the

industry average of 7.9 per cent, it may be reasonable to conclude that much of the crown and bridge work in the practice is already done. Here again, balance is the key.

 Examples of Balance

 
Practice 1
Practice 2
Target
Gross Billings
$1,012,000
$1,048,000
 
Billings : Active Patient
$613
$265
 $500
Assets : Billings
15%
21%
25%
Goodwill : Total Value
83%
82%
78%
Gross : Hygiene Billings
45%
32%
>30%
Top 4 Expense %
39%
32%
<46%
Practice Value
$867,000
$1,347,000
 
Value as a percent of Gross
86%
129%
 

These examples illustrate how the numbers work together to create value. In Practice One, if the dentist had invested in assets at the target amount of 25 per cent it would have enhanced the value by over $100,000 with more enjoyment working in a modern updated facility. In Practice Two, the dentist enjoys good value relative to the gross; however the per patient production is low so there is no benefit from a strong hygiene or restorative program. Value would be enhanced further by balancing this ratio.

Most dentists do not have enough statistical data at their fingertips to determine these ratios. If you do not, a Valuation of your practice will reveal where you stand in all of these critical areas. If you don’t have the information available, compare your practice to the two actual examples above and to the target to see how balanced your practice is.

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

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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