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Issue #14 - 2.27.07
What’s My Practice Worth?
I constantly get this question asked from dentists all over the country. My first response to them is “It depends”. National publications state that dental practices sell for 60% of last year’s gross. In reality that is not an accurate statistic.
There are many factors that can impact your practice’s value. Where you live and how you practice will have the greatest impact on your value. We’ll look at several key factors that can affect a dental practice’s value.
- Area Demographics:
This factor has the most significant impact on a dental practice’s value. Where you practice dentistry really counts! For example, if you live in LA County, it’s conceivable your practice may command a value of 100% of last year’s gross revenue. Conversely, if you practice in rural mid-America, you may see a practice value in the 50% range of last year’s gross revenue. If you are in the Northeast corridor, you can expect practice values in the 60% to 67% range. Why the disparity? It’s all about supply and demand. It’s becoming increasingly difficult for dentists practicing in small and rural towns to attract anyone as an associate, let alone to purchase a practice. Hence, a lower practice value. In large metropolitan areas where many of our current graduates want to practice there is a greater demand for a dental practice and so the practice values rise.
- Physical Plant
Another key factor in determining the value of your practice is the condition and size of your physical plant. If you have older equipment and have not renovated your office for years you can expect a lower value. If you only have two operatories with no room for expansion, do not expect top dollar. Many of today’s purchasers are accustomed to being educated using state of the art equipment and technology, so they feel that practicing dentistry with older equipment and no technology is not feasible. So, if you are considering a practice transition in the next five years, you may want to take stock to see if it makes sense to reinvest in your own practice to potentially increase its market value.
- Economic Variables
In our experience, fee for service practices (include indemnity insurance) command a higher fair market value than practices dependent on PPO’s and HMO’s. Another economic variable that will impact your value is the clinical production profile. For example, practices that refer many services to specialists may command a higher value given the upside potential in retaining more clinical production.
Fee schedules may impact you value as well. We find that fee schedules below the 50th percentile show greater promise to increase revenue quickly versus practices perhaps in the 90th percentile. Practices with high fee profiles can be a challenge for a young dentist with limited experience to acquire, since it may be a challenge to command the same fee profile after the Seller retires.
- Patient Base
As stated in previous columns, the size of your patient base has a major impact on the success of any practice transition, and therefore can have an impact on your practice’s value. Practices with a small patient base (500 to 700 patients) and low number of new patients (3-5) per month will command a lower market multiple than practices that have a strong patient base (1,200 to 1,700 patients) and healthy new patient inflow (15-20)
Patient retention is also a factor that can enhance practice value. Practices with a strong recare program can command a higher value since it is assumed that patients in retention will continue to visit the practice, thus assuring a good revenue stream.
- Age of Patient Base
If you have been in practice for 25 to 30 years, chances are you have treated several generations of patients. This may impact your practice’s value, if an analysis of your zip codes reveals that a significant percentage of your patients are traveling a good distance for treatment. When you retire, these patients once loyal to their “ dentist” will opt for a practitioner in their area once you retire, so you can expect a lower value.
- Location of Facility
If you are practicing in a home office, your market value may be very low and consequently will command a lower fair market value. Home offices are hard to sell since demand is quite limited for this practice type.
- Practice Overhead
Practices with a low overhead (e.g. 50%) will command a higher value than practices with high overhead (e.g. 70%). Simply put, if one buys a practice or becomes a partner in a high overhead practice, the chances of everyone earning a decent income are greatly compromised as well as the purchaser’s “ buy in” or practice acquisition debt. Staff overhead (e.g. 30-35%) can become an issue if you have a highly compensated staff so, usually you’ll see lower value.
Summary:
It’s not all about your tax returns as much as it is the impact of these and many other factors that will influence what your dental practice is really worth.
If you would like to receive a complimentary market analysis, Click Here.
Questions regarding the value of your practice? Email Dr. Snyder at Drsnyder@thedentistsnetwork.net.
Interested in having Dr. Snyder speak to your dental society or study club? Click Here.