The biggest problem we see when we help dentists buy or sell practices is the valuation gap. The valuation gap is the difference between the amount that a buyer is willing to pay for a practice and the price the owner wants.
Sadly, many business owners have a wildly inflated notion of the value of their business. We heard of one gentleman was hoping to sell his business for $1 million. That price would allow him a comfortable retirement and leave a nice nest egg for his children and grandchildren. But the best price he could get was only $100,000!
For dental practices, a common rule of thumb is 55% to 75% of average collections. However, there are many other factors that influence the value of a practice. A practice with new equipment, stable staff and efficient procedures in place will be more valuable than one with outdated machinery, high staff turnover and a chaotic office environment.
The good news is that the dental practices that get the best prices when they’re sold tend to be the most profitable ones before they’re sold. By making changes to decrease the valuation gap, you’ll win twice: first, by creating a business with a powerful foundation — one that’s efficient and profitable with systems that keep everything running smoothly — you’ll make more money now and you’ll probably enjoy working in your practice more. Second, when you’re ready to retire, your successor will gladly pay a premium to buy such a well-run and profitable practice.
Here are the four things you need to do now that will help you build a profitable business now and that will minimize the valuation gap when you’re ready to sell.
- Start planning early.
It’s never too early to begin planning for your retirement. Waiting until you’re emotionally and physically exhausted is too late. We recommend starting to plan your exit at least four or five years before you want to retire. Better yet is eight to ten years. And best of all is the day you buy your practice. By starting early, you’ll have more time to fine-tune your practice so that it becomes a highly desirable asset. Plus, you’ll get to enjoy the benefits of owning a great practice now and for years to come.
- Do a SWOT analysis.
What are the Strengths, Weaknesses, Opportunities and Threats for your practice? Our team can walk you through this analysis. Here are a few questions to get you started.
- What do you and your team do better than the other dental practices in your community?
- Where can you improve?
- Are there trends in the practice of dentistry that you can take advantage of?
- Do you see any changes in dentistry, your community, or among your competition that could hurt your business?
- Find ways to boost your profits.
Net profit is perhaps the most important value driver. Increasing your profits now puts more money in your pocket now, and will get you a higher price when you sell. Here are a few areas to look at:
- Are you getting the best prices on your supplies?
- Do you need as many at the front desk as you now have?
- Are your chairs full all the time?
- Can you negotiate better deals with your labs?
- Are you monitoring KPIs (key predictive indicators)?
- Can you get a better deal on your phone and internet?
- How does your production compare to industry standards?
- Work on the intangibles.
When you focus on how you make your patients feel when they’re at your practice, they’ll become loyal. Your practice won’t be a cookie-cutter practice like the big ones, and your grateful patients will keep coming back. They’ll also send you referrals. Referrals from your best patients will help you build a better quality patient base. Your practice will have a positive reputation in the community.
Developing processes and systems for doing everything (and we mean everything!) at your practice will help you create a streamlined practice that runs like clockwork. Establishing rigorous financial control procedures will also help keep you safe from embezzlement and theft.
By building a better practice now, you’ll build a business that sells for a higher price. You won’t have the shock and disappointment of a valuation gap. You might even get a higher price than you expect.
Does your practice have a valuation gap? Do you know what your practice is worth? At the Hindley Burgmaier Group, we can help you with an estimate of its current value, and find ways to maximize its value, and put more money in your bank account now. We are hosting a live workshop on September 26th or 27th at our training center. Call our office at 505-299-8383 to reserve a space or to find out how to make your practice the best it can be!