Seminars

Factors to consider when determining a practice value

Factors to consider when determining practice value

written by Charles Kim, Dental Practice Broker, Practice Concepts
There is no one size fits all, or “rule of thumb” method to accurately determine a value of a dental practice. Several factors will need to be considered, and some of the more common factors are explained below. In some markets, practice values are higher than the national averages, and in other markets, the values are lower. What are some of the reasons for this wide range in values? There could be more factors and mitigating circumstances that are unique to each practice, but a good understanding of these primary factors may help a practice owner, or potential buyer, to understand how a practice value is determined in their area.

Location

Location and the demographics of that area can have the most influence on the practice’s value. For instance, dental practices located in Southern California, especially in metro areas, may have a value as high as 80% or more of the annual gross revenue. On the other hand, if a dental practice is located in a more rural, remote, or a relatively underserved area, the practice value could be in the 40% range or less of last year’s gross revenue. A simple reason for these differences is supply and demand. There are less associates, buyers, and practice owners practicing in these less populated areas. Therefore, a lower practice value is expected. Most of the nation’s population resides in metropolitan areas, and as a result, most recent graduates desire to practice there as well. It is typical for most dentists to prefer to live near one’s own family or network of friends. Therefore, there is more demand for dental practices in these markets, and as a result, the practice values tend to be higher due to increased competition from more buyers. In addition, most major metropolitan areas have a number of dental schools which produce hundreds of new graduates each year. Often, these new graduates choose to remain and practice near their schools, as they may have already developed a network in the area before they embark on their dental career.

Collections/Overhead

The second biggest factor affecting your value is how profitable you are as a business. Next to location, purchasing a practice with a stable income history is an extremely important consideration for most buyers. For example, practices with a low overhead of 50%, usually can have a higher value than practices with higher overhead around 70%. Basically, if your practice has a higher overhead, it makes it more difficult for a buyer to keep up with their expenses and thus a lower practice value is a reality. For example, 2 practices that both collect $1 million per year, in the same city, may not have the same practice value. If one practice has a 50% overhead, compared to a second practice with a 75% overhead, the resulting earnings for the owner could be quite different. As a result, the practice values would also vary despite showing similar annual collections.

Patient Base/Active count

The patient base and the number of active patients has considerable influence on the success of a practice, and will have an impact on the practice value. Practices that have a smaller patient base (500 to 700 patients), along with a lower number of new patients, for example (3-5) per month, usually are valued lower as compared to practices having a larger patient base (1,200 to 1,700 patients) with healthy new patient inflow averaging 15 to 25 new patients per month.

Assets/Buildout

Although location and financial history may have the most influence on a practice value, another factor is the condition of the practice assets. If you have older equipment and have not renovated your office for years, you should expect to see a lower practice value. The absence of updated technology, widely considered to be standard by younger buyers, such as digital x-ray, or electronic records, will also impact your value as well. The buyers may remain interested, but they will be factoring in the need to spend more money to upgrade or renovate the office when they are ready to make an offer. Therefore, current practice owners who are considering a practice transition within a few years may benefit from some equipment and technology updates, which could not only increase the productivity of the practice, but possibly increase the future market value as well.

Type of facility/Lease

Another factor that has been affecting practice value is the type of facility. There is a greater trend from buyers who prefer practices in retail, or street front locations, with signage compared to offices located in professional buildings. For example, a practice located in a large retail/shopping center may sell more quickly, or even for a better price compared to a similar practice located in a professional building. The practice that is located in a retail setting may not necessarily have a better chance to succeed, or it may also require a much higher lease expense. However, the trend from younger buyers to prefer a visible and retail setting has become more apparent in recent years.

Transition plan

Depending on the experience level of a potential buyer and the amount of “hand-holding” they may desire after the purchase, a seller’s flexibility regarding transition assistance can also influence the final value of the practice. Or, in the case of experienced buyers who may already own multiple practices, they may not have the availability in their schedule to replace the seller. In these cases, the buyers often ask the seller to remain as an associate until the new owner is able to locate the right personnel to provide coverage. Certainly, there is no standard transition plan that can work for all situations, but it will benefit both parties to determine a balanced arrangement that can provide the buyer with more motivation and confidence. As a result, the seller may enjoy a stronger offer price by accommodating the buyer’s needs.

Summary

In summary, the topics mentioned above are just some of the common factors that can affect a practice value. A dental practice’s value is not entirely based on a rule of thumb, or a standard percentage of gross collections that can be widely applied to every practice. Those “guesstimates” are discussed in the industry among both practice owners and buyers, however, it fails to take into account the unique characteristics of each practice, such as location, size of patient base, cost of lease, transition plan and many other factors that can affect the practice value.– written by Charles Kim, Dental Practice Broker, Practice Concepts

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