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Issue #36 - 1.8.08
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Enhancing Your Practice’s Value
As we begin the New Year, you may be planning for a practice transition. This transition may mean your pending retirement involving a practice sale or recruiting your first associate who may become your partner and future transition solution.
Your practice’s value may also have a bearing on your decision, so if you want to enhance your value here are a few areas to consider:
Your Profitability - Practices that have high overheads typically do not command as high a fair market value as practices with similar characteristics. If your overhead is greater than 65%, your practice’s value may be compromised. To correct this problem, take a hard look at your expenses. The most controllable items are: staff expenses, lab costs and dental supplies. Your efforts to reduce cost may reap a higher practice value.
Size of Patient Base - Practices with a strong active patient base usually have a higher value than those practices that do not. The first step in sizing up your patient base is to take a critical look at your re-care program. Many practices suffer from slippage, (patients falling out of their normal re-care cycle). By improving patient retention, you will not only increase practice revenue, but your number of active patients as well, thus making your practice a better value for a sale or partnership
New Patient Flow - Low new patient inflow (2 - 4 patients/month) can signal a practice in decline, thus, affecting your practice’s value. So, if you are trying to maximize your practice’s value, do everything possible to “ramp up” marketing efforts to reverse the downtrend.
Location - As mentioned in previous columns, your practice’s location will have a critical impact on your practice’s value. Practices in smaller towns or rural areas will usually command a lower market value compared to practices in large metropolitan areas and adjacent suburbs. So this reality must be accepted. However, for those practitioners with a “home-office”, market value is typically the lowest no matter where located. If you have a longer transition timeframe, (5 to 10 years) you may consider a move to a separate business location. Careful economic analysis of any relocation costs must be made to see if the financial investment is worth the opportunity to get a higher value at a new location.
Physical Plant - Most young dentists do not enjoy practicing in older facilities, and the valuations of dental practices typically consider this fact. Consequently, older equipment and an out of date facility will always be a detrimental factor in your dental practice’s value. If you are going to practice at least 5 years, it may make sense to reinvest in your practice to increase the probability of receiving a higher practice value. Conversely, if you are only planning to practice a few more years, it may make no economic sense to invest significantly for the opportunity of getting more for your practice.
In some states, former employees can allege sexual harassment up to six years after they leave or are dismissed from an employer. However, if a departing employee is provided an exit interview form and they do not state on the form that they feel they were sexually harassed during the term of employment, the chances that their allegations will be dismissed increase significantly. “The fact that they did not claim harassment on the exit interview form is devastating evidence against a former employee who later tries to allege harassment,” emphasizes Mike.
Technology - Practices with little or no technology usually have lower values than their counterparts who are “up-to-date”. Obviously, the more clinical technology you have the more valuable your practice may become.
Future Lease Options - If you are in the final stages of your lease and you are thinking of a transition, make sure your lease is renewable. If not, your practice’s value will be severely compromised. Getting your lease renewed with two five-year or a ten-year renewal option will be a good step to take to maintain your practice’s value.
Associates Without Contracts - If you hired an associate and there is no contract, this will usually have an adverse impact on practice value. Values tend to be lower in cases where an associate can leave and solicit patients or even open an office nearby! So, if you are in that position of employing an associate who is not the candidate for your transition, try to get them to agree to a contract that will prevent these negative events from occurring. An economic incentive may be required to provide consideration for an associate already employed to sign a contract with some restrictions.
Summary. These are only a few factors that can impact the value of your practice. Remember, it’s not only tax returns that determine the value of your practice, but it is also a group of factors, many of which you have direct control over.
The Snyder Group provides a vast array of practice transition services including practice valuations. Please visit their website for details.
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