I love buffet lines. Not just for the obvious stuffing-my-face reason, but because they’re great places to overhear unguarded conversations. This happened to me a couple of years ago at a dental conference, where two older dentists in front of me were chatting, clearly talking out loud about the value of their dental practices.
Dentist 1: “I can probably get $700,000 when I’m ready to sell. My practice got $750,000 in collections last year and $850,000 the year before that.”
Dentist 2: “You might buy some equipment. My equipment rep recommended a 3D panoramic machine and said I could get the whole price back when I sell.”
Dentist 1: “Good call. Maybe I’ll do that and ask for $800,000. I heard John sold his practice last year and got $1 million for it! My practice is just as good as his.”
It was tough for me not to chime in. Neither of them was talking about the No. 1 driver of a practice’s values: profits. And they weren’t talking about how they were preparing to maximize that practice value. In fact, I’d be willing to bet they weren’t making any preparations — at least not effectively.
The problem, and the reason I needed to bite my tongue, was that if the dentists wanted to increase their practice values, they needed to know how practices are actually valued and prepare to sell a lot earlier.
If you own a practice, the best way to increase your practice value is by learning some basics about valuations and preparing now to sell, not when you are ready to sell.
In this way, selling a practice is a bit like selling a home. Curb appeal matters, maintenance matters, and — if you care for your home the right way — you’ll get a better price when you eventually sell it. And doing that work right before you sell will be stressful, difficult and likely very expensive. Better to do it sooner rather than later. Getting the lawn looking fantastic could be a matter of spending thousands on installing new sod a month before listing, or you could simply buy a couple of bags of fertilizer a few years in advance.
Average Values Will Mislead You
Do you know how your practice is valued? Many dentists I talk to believe that it’s a simple formula mostly based on collections. Multiply your collections by the average for the area and you’re good to go, right? Not quite.
There is an average price-to-collections price for dental practices in the United States, and it’s helpful to know. The average practice sells for just below 75% of collections, and that number has risen slightly over time.
But don’t do what most dentists do with this information. Most dentists think linearly, with the average to their detriment:
“Let’s see: My annual collections are $600,000, and they told me the average general practice sells for 75% of that, so that would be $450,000. I’ll round that up to $500,000 because I bought a 3D panoramic machine 10 years ago.”
Sorry to burst your nitrous-filled bubble, but knowing an average selling price does not give you a magic formula to know the value of your practice. Knowing average figures is a good starting point, but there will be many practices that sell a bit below or well below that average number. About half the dental practices in the United States sell for a price below the average. Be open to at least the possibility that yours might be one of them.
Profitability and the Qualitative Features of Your Practice Truly Determine Value
If it’s not about the average sales number, then how do you value your practice? Valuation professionals will look at two main factors beyond collections: The first is profitability, and the second is qualitative features unique to your practice. The most common valuation method uses profit as its baseline. Profit is the net income of the business after accounting for all normal and necessary business expenses. Specifically, earnings before interest, taxes, depreciation and amortization (or EBITDA). In broad terms, this equals the take-home pay of the dentist who owns the practice.
An accountant, broker or seller’s coach will calculate the practice’s EBITDA, adjusting the valuation up or down depending on how well the practice is managed financially. If two practices are collecting exactly $1 million, with one putting $200,000 per year in the owner’s pocket after expenses and the second putting $400,000 per year in the owner’s pocket after expenses, the second practice will be worth more.
Even if you’re years or decades away from selling your practice, preparing to sell can increase the value of your practice by a huge margin. It’s all about controlling your overhead. Staff, equipment, building maintenance, marketing and so on — all of these factors are vital parts of running your business, and keeping those costs low increases your profit margin and makes your practice more valuable.
I have found that, in general, practices sell for about 2× one year’s profit, but the final sales price varies around that number in roughly a normal distribution.
The second major factor affecting your practice value will be the qualitative features of your practice. Clinical focus, rural versus urban geography, age of equipment, number of operatories, building type, interior design, insurance focus and seller’s post-transition plans all play major roles in determining value.
This is when doctors who have an eye on preparing to maximize their practice value will come out ahead. As an example, Dr. Smith owns a practice with $1 million in annual collections. He figures he’s about six years away from retirement and knows that, eventually, he’ll sell the practice and walk away. Dr. Smith is smart and knows that his 70% overhead is a bit high and won’t be very attractive to potential buyers. So he spends a year working on controlling that overhead. He hires an interior designer to come spruce up the interior and landscapers to get the exterior looking immaculate. He implements cost-saving measures on some runaway lab fees and equipment costs. When a hygienist quits, he replaces them with someone greener for a lower wage.
Had he done nothing, when he sells his practice five years later, he might get 1.7× of his annual profit of $300,000, so his $1-million-collecting practice would sell for $510,000. But he didn’t sit back and do nothing. With some hard work, Dr. Smith brought his overhead down from 70% to 60%. Now, with annual profits of $400,000, his practice is much more attractive and goes for a full 2× his annual profit. So instead of settling for $510,000, Dr. Smith sells his practice for $800,000, a much better injection into his retirement portfolio.
Thinking ahead isn’t just about the sale. Dr. Smith had five years with $400,000 in annual profits instead of $300,000. Over five years, he put an extra $500,000 into his own pocket.
By now, it’s clear why I squirm in buffet lines listening to dentists talk solely about practice values in terms of collections. Profit and the unique qualities of the practice matter more. The best time to increase your practice value is now, by improving those profits no matter where you are in your career. Five years of an extra $100,000 per year for Dr. Smith was great, but what if it had been 10 years or more? Not only would Dr. Smith be more secure in his retirement, he may have gotten to the point of retirement years earlier.
Save $50,000–$100,000 When You Do Sell
The final step in determining your practice value is to actually sell your practice and to decide whether to do it yourself or hire help. Hiring the right help in most cases will actually increase your practice value, and a relatively new development in transitions is decreasing the amount of money it costs.
For most dentists, when the time comes to sell, the choice has traditionally been either a do-it-yourself approach to save money or hiring a full-service broker who will charge up to 10% of the sticker price of the practice. That can be a tough pill to swallow for many dentists.
A good broker is worth his or her fee many times over. Good brokers around the country can maximize practice values while finding the best buyers the quickest. They know how to structure deals correctly to put the most after-tax money in your pocket after the sale. But not every broker earns their fee, and not every practice transition needs to involve a broker.
Your choice isn’t just between hiring a broker or trying to do it yourself. Most sellers aren’t aware of a growing third option — seller’s coaches. Seller’s coaches are increasingly providing most of the value of a traditional broker at a significant discount.
Seller’s coaches typically look and feel very similar to a broker but are able to work with clients nationwide. They will provide most of the services a broker provides but at a lower price point and without necessarily being physically present in your city or state. Seller’s coaches compensate for their inability to be physically present by using technology and specializing in certain types of sales.
Two hurdles have traditionally kept brokers to a regional, geography-specific model. The first is the need to make a personal connection with a selling doctor and be available to physically walk buyers through the office of the seller. Technology is changing the landscape here. The second hurdle is the geographic-specific knowledge to know how to present cities, neighborhoods and even street corners to would-be buyers. Again, demographic technology is making shifts in the landscape here as well.
Unlike the traditional 10% broker fee, seller’s coaches typically charge a smaller percentage or flat fee — typically between $25,000 and $50,000. A dentist with a practice that sells for $1 million can choose between a broker charging 10% ($100,000) or a flat-fee seller’s coach. Going with the seller’s coach could save that dentist as much as $75,000.
Armed with a little knowledge, you’ll be the smart dentist in your next buffet line conversation. Increase your collections wherever and whenever you can, but pay special attention to your profit margin and the qualitative features of your practice. Doing so will increase the value of your practice today. And choosing how you best harvest that value when you do sell can yield even more value for your business. You got into dentistry and bought a practice because you knew it could be a strong, stable source of income over your career. Make it valuable now, and enjoy the benefits both today and when you eventually sell.
Brian Hanks, MBA, CFP, is a dental accountant, author of “How to Buy a Dental Practice” and host of the “Practice Purchased” podcast. He also represents buyers in dental transitions nationwide. To comment on this article, email firstname.lastname@example.org.