The Dentist's Network #24


	Lifetime Patient Value Partnership Buy-out Formula

Joel Harris, President
ADA Intelligent Dental
Marketing, Inc.
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Understanding the Lifetime Value of a Patient

The greatest asset to your practice is your patient base. It’s an obvious concept that almost all dentists understand. However, I believe that most dentists never quite understand the actual “lifetime value” of a patient in dollars and cents. Without knowing the value of a patient, it is impossible to determine the appropriate budget for acquiring each new patient through a marketing campaign. In our company we refer to this knowledge as “Patient Lifetime Value”, or PLV.

In past years, I've met hundreds of dentists and office managers who don't have a clue as to what their Patient Lifetime Value is, much less its importance and the impact it has on their bottom line and the appraisal of their practice. To most of them, what matters most is daily production numbers and a full schedule.

One of the basic marketing mistakes that owners of dental practices make, is not knowing what the budget should be for acquiring a new patient. Let me keep it simple: it will cost you five times more to attract a new patient than it will to bring one of your past patients back to you. Also, remember that a referral from an existing patient is much more affordable than obtaining a new patient through something like a magazine ad or yellow pages ad.

Don’t get me wrong. I’m not suggesting that you cease any external marketing efforts. Effective advertising and external marketing tactics are critical for maintaining a fresh flow of patients. Just make sure that you understand the relative cost to acquire a new patient so that an appropriate budget can be determined.

As I’ve already explained, Patient Lifetime Value is defined as the total value, in dollars and cents, of your average patient, spanning the entire period of time that those patients are likely to do business with you. It's the potential financial contribution of your patients to your practice over a period of time.

Here's an easy way to calculate your Patient Lifetime Value:

Let's say you have 1,000 active patients and these patients remain with you for an average of three years. (Remember that some patients will be yours for many years and that some will only visit once.) Now let’s say for the past three years, your personal income was $900,000. The Patient Lifetime Value can be calculated as: $900,000 divided by 1,000. The total is $900.

What this means is that over an average patient lifespan of three years, each new patient you could acquire and keep is worth $900 to you in profit. Don’t confuse the $900 with the total services that are provided to your patients. We’re talking specifically about net profit, or for most dentists their personal income after expenses. Practice management companies and accountants do a great job of determining the value of a patient base, but I like the simplicity of this formula when determining the budget for a marketing campaign. If you do not have the actual figures, you'll have to estimate. My advice is that you be conservative in your estimation.

When you know the lifetime value of your patients, you can determine how much time, effort and money you can afford to invest to acquire that patient in the first instance. For most dental practices this exercise will show them that the value of new patients is high and that a healthy budget should be created to sustain a consistent new patient acquisition strategy. In other words, by investing more today you’ll reap much larger profits later.

Every marketing campaign that you undertake costs you money but should reap benefits such as more patients, increased profit, enhanced corporate image, etc. But how can you be sure that the benefits would outweigh the costs or investments? This is where knowing the Patient Lifetime Value is so powerful - it helps you to determine this even before you launch your marketing campaign.

When you start to see every patient as an ongoing stream of revenue and hopefully a source of referrals instead of seeing them as just an initial hygiene appointment or one crown, you’ll learn to see past your short-term schedule and your short-term problems. Instead of constantly struggling to acquire more and more new patients, you can begin to focus on maintaining your existing patient base longer and selling to them repeatedly.

You may spend more in the short run through advertising and by making more attractive offers than your competition, but those patients will be your bread and butter tomorrow, six months from now, and hopefully five years from now.

By understanding your “PLV” you’ll know that your budget can only be $50 to acquire a new patient or maybe $350. You’ll be able to plan and create a long-term strategy for success. Keep in mind that if after calculating your PLV your budget seems too low, you may have other problems in your practice such as poor case acceptance or fees that are too low.

Begin today to have a proper understanding of Patient Lifetime Value, and it will become one of the keys to the success of your practice. It will allow you to acquire more patients than your competition through better and more attractive offers; it will dramatically fill your schedule from more repeat sales and it will increase your profitability more than you can imagine.

Interested in increasing your new patient flow? Click Here
To reach Joel Harris Email him at Joel@thedentistsnetwork.net

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Thomas L. Snyder, DMD, MBA
Managing Partner
The Snyder Group, LLC
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A Fair Way to Buy Out Your Partner

In this final article of this three-part series about partnership issues, this topic has often caused the most consternation. Many senior partners are often times left with the unfinished business of being bought out. Whether it is due to high expectations for a final buy out value or a disinterested junior partner who does not want to incur additional financial obligations, this final piece of a transition plan can be a financial disaster. It is our recommendation that when partnerships are formed, there should be a mandatory buy out at retirement to avoid disagreements that can ruin friendships, cause legal battles and just end in bitterness.

In the event that the junior partner does not buy out the senior partner, a liquidated damages clause should be invoked and a financial penalty assessed to the junior partner to offset the financial hardship that a senior partner may endure if the junior partner does not buy out the retiring partner. Furthermore, if the senior partner is forced to enter the marketplace and recruit a third party to buy out his or her partnership interest, the value received may be substantially lower. Conversely, the junior partner may feel obliged to buy out the senior partner but at a greatly reduced value since no formula for a retiring partner was written in their shareholder or partnership agreement. In other instances, senior partners who have reduced their clinical hours as well as their clinical production unrealistically demand a full fair market value for their partnership interest. This, in our opinion, is also an unfair situation for the junior partner who, in the fact, may be supporting the majority of the practice’s overhead is unwilling to pay full market value.

To address these scenarios we have designed a partnership buy out formula that will provide a fair and equitable buy out strategy for a retiring partner.

Valuing the Practice
As discussed in prior articles, a dental practice’s value consists of two asset classes - Tangible Assets and Intangible Assets. Tangible Assets include equipment, dental supplies, leasehold improvements (sometimes), dental instruments and technology. Intangible Assets consist of goodwill, location, phone number, restrictive covenant, etc. From our experience, in valuing numerous dental practices, we have found that approximately 24% of a practice’s value consists of Tangible Assets and 76% is allocated to Intangible Assets. Therefore, in our buy out formulae, we manipulate the Intangible Asset Value to address issues that may lead to a discount of the practice’s buy out value.

If in fact the Senior Partner has not been contributing near the same level of clinical production when the partnership was formed some form of discount is appropriate. When it is time for the Senior Partner to retire, the practice is revalued. A new equipment appraisal is ordered in order to calculate the value of the Tangible Assets. The Senior Partner should receive his/her full share of the Tangible Assets at fair market value. Accounts Receivable is paid out to the retiring partner, usually over a 12 month period. Any cash in the partnership’s or corporate account should be split based on ownership interest. Finally, any liabilities are deducted from the practice’s value. Often times, the amount of the retiring partner’s accounts receivable is used as an offset against any outstanding liabilities.

Since Intangible Assets comprise the majority of a practice’s value, by adjusting this value you can achieve sizeable discounts if the retiring partner has not been substantially contributing to practice production. A description follows as well as an example illustrating how the process works.

Step One:
At the formation of the partnership, we calculate the relative proportion of personal clinical production between the partners. This number is then recorded for future application in the case of the retirement of a partner, as well as our formulas for applying discounts in the event of death and disability.

Step Two:
When the senior partner retires, we then recalculate the relative proportion of personal clinical production between both partners and if there is a difference, an adjustment is made in the following manner.

Subtract the difference between the baseline production ratio and the current production ratio
Take the difference between and divide that number by the original production ratio
Take the percentage reduction and multiply be the Intangible Asset Value to calculate the discount to Intangible Asset Value.

For example, if the senior partner has been working less days and produces less, this discount can be as high as 25 to 35% of the Intangible Asset value. Conversely if a retiring partner wants close to receive full practice value then he/she is motivated to remain productive and not reduce their workload...

Case Study – Partner Buyout

Future Buyout Using Discount
Case Study
Practice Value in 2007			$796,200
	Intangible Asset Value (IAV)		$706,200
	Tangible Asset Value (TA)		$90,000
Full 50% Practice Value equals			$398,100

Step 1	Establish Baseline for Clinical Production Ratios
		1999	2007
	Dr. Senior	52%	40%
	Dr. Junior	48%	60%

Step 2	Calculate % Reduction in Clinical Production Ratio
	Dr. Senior (1999)		54%
	Dr. senior (2007)		- 40%
	Difference		12%

Step 3	Calculate Discount Rate on Clinical Production Ratio
	12% (difference) / 54.7% (baseline) = 22%

Step 4	Calculate Amount of Discount for Intangible Asset Value (IAV)
	Full 50% Value		$398,100
			X .22
	Discounted IAV Value		$87,582

Step 5	Calculate Discounted Sale Price
	IAV ($398,100 - $87,582)		$310,518
	50% of 2007 Tangible Assets		+ 45,000
			$355,518

Step 6	Summary Calculation of Valuation Discount
	Full 50% Value		$398,100
	Adjusted 50% Value		- 351,537
	Discount Applied		$42,582

Summary:
Partnership relationships are all about fairness and throughout this three-part series, you have learned that there are varying ways that income can be split, profits shared, and buy outs preserved. Using this approach can mean that partners do not have to resort to legal means or the courts to resolve their differences.

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Questions regarding Partnerships? Email Dr. Snyder at Drsnyder@thedentistsnetwork.net.

Interested in having Dr. Snyder speak to your dental society or study club? Click Here