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Volume 65: Do dental equipment and dental technology affect a practice value?

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In our business as dental practice valuators, most of our practice valuations are for dentist’s who are not planning to sell their practices for at least five years, but want to make their practice more valuable for the future. We are constantly asked about whether or not the adoption of new equipment and or technology can increase the value of a practice.

The short answer is; Yes, under favorable conditions, the adoption of new dental equipment or technology can increase a practice’s value beyond the value of that specific piece of equipment. This fact actually creates goodwill in the practice, which is the goal of dental practice owners. From a practice valuation standpoint, the reason that a practice value may change is due to the possibility that the equipment or technology somehow affected practice cash flows and earnings.

When researching this article, one of the dentists I spoke with said that the successful adoption of technology into his office let him do in two hours what it formerly took him an entire day. He called this success, his offices “Techwill”.

In a typical dental practice valuation, the typical value of equipment (excluding leasehold improvements, and supplies) relative to a practice’s total value is approximately 10-15 per cent. Therefore relative to the entire practice, equipment and its contribution to a practice’s performance is sometimes overlooked. There is a significant investment in equipment that is functional in nature – compressor, cabinets, chairs, X-rays, handpieces etc. – which are required to operate a general practice. And then there is the other category which may include new or high technology. The acquisition of the functional equipment is necessary to keep a practice operational and it needs a proper budget allocation for eventual updates. But it is the adoption of technology that needs to be well planned, because if the investment fails, there is a cost to your practice. I believe that your goals should be to remain current with technological advancements and to determine if they fit your practice, as well as the possibility of a return on the investment.

While there are advantages to the adoption of new equipment and technologies, there are occasions where having too much, the wrong type, or unused equipment will detract from the value of a practice due to depreciation inefficiencies. In addition, if the technology is overly specific, there may be a limited number of buyers who will place value on that technology. Also, just because an asset doesn’t add value, it may enhance your clinical satisfaction, and make you happier to go to work, which is priceless.

The most important factors to equipment and technology decision making should be: 1. Does it have a clinical advantage? And 2. Does it have a benefit for my patients? Once that is determined, and you are confident in the technology, the financial portion of the evaluation of the asset can begin.

Here are some examples of very generic purely, mathematical models of how a piece of technology can affect practice value. Let’s takes a practice that we valued in 2014. The practice was valued at just over $900,000, and had all factors in balance - good production, good patients, good profits and good location. If we simply made the following adjustments to the input factor in our valuation template here is what we found:

Example 1
If this practice had a four year old Intraoral Digital Radiography system valued at $15,000 and produced savings of approximately $8,000 per year in film and time costs, the value of that practice would have increased $23,000, or $8,000 in goodwill.

Example 2
If this practice had a four year old Digital Panoramic system, valued at $30,000, and its revenue less loss revenues from FMX, was $4,000, the value of that practice would have increased by $39,000 or $9,000 in goodwill.

Example 3
If this practice had a four year old CD/CAM system valued at $65,000, and produced $30,000 in lab savings per year, the value of the practice would have increased by $102,000 or $37,000 goodwill.

Example 4
If this practice had a four year old CAD/CAM system valued at $65,000, and it was unused, the value of the practice would have increased by $47,000, a decline of $18,000 of goodwill. These examples are very simplistic, as maybe other factors changes in the practice that may not have been exact, however, if cash flows can be improved, practice values can be increased.

These examples are not the only examples of equipment enhancements, as there may also be equipment that I have missed, including cone beam Panoramic X-rays, soft tissue lasers, office expansions to add capacity, cost savings due to time savings, etc. In addition, I have not considered the tax or financing considerations of these decisions, as those matters should be dealt with by your accountant.

In addition along with the possible practice enhancers, because we are in a more competitive dental environment, there may be an advantage to consider technology. In some cases, it may also help attract or retain patients due to the perception of being a technologically current practice.

In summary, your equipment and new technology plan should receive as much attention as your marketing, practice management, and clinical areas of your practice. The goal is to create an equipment plan that has budget to replace and update functional assets, and a budget or strategy to review the costs versus benefits to your practice to possibly take advantage of the currently available technology. I hope that down the road some if this new technology will help you to create your own practice “Techwill”.

Colin Ross MBA, is a Partner 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: colin.ross@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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