Your practice value is worth more than just numbers, it represents your life’s work. Your practice should always be in a maximum value position so you are prepared for planned or unexpected events that may occur at any point of your practice cycle/career.
Here are just a few reasons to be ready:
- Unexpected/sudden illness
- Family needs to relocate
- Another business opportunity arises (clinical/non-clinical)
- Bringing in an associate
- Bringing in a partner
- Going through a divorce -asset determination
- Considering selling and staying on yourself as an associate
- Considering selling and retiring
- Wanting to know which areas of the practice need to be worked on
Transitions can occur at any and all times during your dental career. Whether your practice is in early stages of growth, sudden and rapid growth occurs, or when you are nearing retirement stage, the unexpected can happen.
What is Fair Market Value? (FMV)
This is the value of a practice that offers the maximum price for the owner but also provides the ability for the buyer to walk in and make a “living” from the first 12 months. Remember, almost every sale (currently) involves the buyer having to get financing from a bank or some other source.
What are the most important factors in determining FMV?
Begin by adding up a number of key practice factors (Examples: collections, location, profitability, active patients, hygiene department, equipment, lease, who is staying on). Then examine cash flow and make adjustments to what the buyer will have using the current 12 month collections vs. previous 12 months.
Ultimately, it comes down to cash flow. Based on a percentage of collections, the current profit needs to be adjusted to include buyer’s expenses, including their financing costs and possibly paying the selling doctor to stay on as an associate.
Considering that there is usually ZERO growth in first year of the new buyer, there needs to be enough profit to ensure there is little to no risk of defaulting on the loan. If there is enough money for the buyer to make a living, it is possible to increase practice value/price. If not, you have to decrease it until you see the appropriate new cash flow.
It is important to note that purchasing state of the art equipment within a short period of time before selling, thinking that will increase value, may backfire on you, especially if it hurts cash flow significantly. Do this only if your equipment absolutely needs to be replaced (very old or not functioning well). However, implementing technology or software, that is modestly priced, can help you analyze your practice better, increase marketing results, and/or increase efficiency/collections, may be a good idea!
Look at the big picture..
What your practice did 3 – 5 years ago literally means NOTHING! It’s what your practice can do for you now, in the future or for a new owner.
Focus on the following areas:
- Location – Is your practice in a prime location? If not, determine what can you do to increase the value of your practice without moving.
- Lease (if applicable). Is it 5 – 7 years? Are there options to renew or extend the lease?
- Is it assumable/assignable? Is it within market value? Space – How many equipped operatories do you have? Is there additional room needed to expand?
- Collections – How can you increase collections from previous 12 months?
- Profitability – What is your net profit after overhead expenses? How can you improve your profitability?
- Patients – Do you know the number of truly active patients that you have? Are you actively working on getting consistent number of new patients monthly?
- Hygiene department – What can be done to increase productivity?
- Owner – If you are selling, are you planning on staying on as an associate? If you are buying, do you want the selling dentist to stay on as an associate? What are the advantages or disadvantages?
- Staff contracts – Have the current staff signed written employment agreements? Are there long-standing staff members? Are they staying with the practice?
Whether buying or selling a practice, it is important to determine whether or not the employees have written employment agreements. This reduces the liability of the future owner in the event that he/she may need to terminate a long-standing employee. Having written employment agreements can actually increase the value of your practice by limiting any future liability for the owner.
Practice transitions can occur at any time during your dental career. The unexpected can happen. Don’t “assume” your practice will sell at the “going rate”. It’s really about cash flow. Always focus on collections and ways to reduce overhead. When you are ready to sell, you deserve to receive full value for your practice. It’s more than just numbers, it’s the investment of your time and your life’s work.