How much is a dental practice worth?
That question occurs to many dentists as they approach a time in their careers when they are considering selling their practices. You need to plan an exit strategy in advance !
The New Owner can Build it up Easy
I hear this all the time. The seller dentist says the buyer will be able to do all these easy things that will make the office far more valuable. If its so easy to do then the seller dentist needs to do it BEFORE listing it for sale. No buyer is going to pay for what an office potentially would be if they invested time and money into growing that practice. It might give them incentive to buy this practice because it has excellent growth potential. But, they are only going to pay for what it is worth when they buy it. If they buy it and then invest time and money growing it then that growth is their new equity in the practice. Just like buying a fixer upper house below the prices of other houses in the neighborhood. You buy a fixer upper at a discount; put time and money in, and then the house will be worth what the other houses on the block are worth. An if you did it right then the price you paid plus the time and money you put in is equal to or less than the value of the other homes on the block. Otherwise you might as well have bought a house that didn’t need all this fixing up and winds up costing more in the long run.
How much dentistry the seller refers out
The more dentistry the seller refers out the more valuable the practice will be to the buyer. The more skilled dentist who has significantly superior skills and refers out very little dentistry; and in fact some buyers would have to refer out more dentistry if they bought this practice, the gross and net revenues would be more difficult to maintain unless another very skilled dentist purchases the practice. All those additional skills can make finding the buyer more difficult because the buyer has to have those additional skills.
When you have been going to the same office every day for 30 years like I have then its hard to really see what you have. But, when I go around and visit other dentists its only then I get a better idea of the curb appeal of my own office. If you have a brand new beautiful office then you know it. If you bought your office 30 years ago; it was old then and you haven’t updated it since, it is not going to look appealing to a young buyer. They have invested hundreds of thousands of dollars in their education and now they want to go out and get a return on that huge investment. Buying an office that is a mess with 30 year old equipment, no computers, no digital X-Rays and and an old looking reception area is not going to appeal to them. If you are somehow doing a million dollars in that office someone will certainly buy it. But, if it is a small part time practice then very few would want it. Maybe in Manhattan where people are losing their leases all the time someone would want to buy it because it’s easier and faster to renovate a space than to build from scratch. But elsewhere it is not going to sell in its current condition.
This was a great model for success in the 50’s and 60’s. Today there are very few dentists who will buy a home office. Home offices can sit on the market forever and no one will buy them. One reason is that as real estate has appreciated many times in value dental practices have not. In the old days the practice would be worth much more than the real estate; add in all the tax advantages of a home office, and everybody wanted one and could afford one. Today when the real estate is worth much more than the practice it becomes impossible to find a buyer qualified to take on all that debt at one time. And no bank will finance a young dentist who is already hundreds of thousands of dollars with hundreds of thousands in additional debt. And if the buyer has no debt and deep pockets their spouse will not want a dental office in their beautiful home. Same thing is true if its an expensive condo or co-op and a small or part time practice. Best thing to do in a situation like this would be to sell the practice to one person and the real estate to another. Its more work to sell them separately and on paper it may look like you are losing money but in the long run it can be sold that way. Trying to sell the package might never happen.
True Net Income
We are all so busy with patient care that going through our tax returns to see what we really make is something no one does. When I say really makes I refer to the fact that an owner dentist will pay some of their expenses legitimately through the business but if they were an employee dentist the employer would not pay those for the dentist. So if you sell your practice and stay on as an employee dentist; getting paid a usual and customary 35% less lab, those expenses would now need to be paid out of that rather than off the top like you have been doing all these years. Think of them as ‘Elective Expenses’ such as disability, life, malpractice and health insurance. You have been paying these from your gross revenues all these years but most employers are not going to pay these for you. Add back your cell phone , CE courses, travel expenses, meals, auto expenses and additional expenses that will now have to be paid by you from the 35% less lab. When you look at the number you pay taxes on and add back all those ‘Elective Expenses’ that is your True Net Income. And True Net Income is what ultimately determines the value of a practice. The bank who will be lending the buyer the money will be looking at this True Net Income so they feel comfortable that this money they are lending will be repaid. That the buyer can repay the loan is the bottom line to the bank and will determine whether the buyer will be able to get financing; and actually buy the practice, or not. The buyer can agree to pay more than the office is worth but the bank will deny the loan if they don’t see that value and would risk not getting their money back.
So what is it worth ?
The true value of a practice is based on its True Net Income. But since that is hard to determine less an investigation of that net income, most people take their gross income and multiply it by a percentage to get a rough idea of where that value would fall. Eventually a formal Evaluation of their practice needs to be done to determine a true value. But, for a quick calculation take your gross and multiply by 60%. If your practice has higher gross and net figures as well as a modern beautiful facility then maybe you can get 70-80%. If your office is part time with a low gross and net and it would need an investment of time and money to make it into a healthy practice then 40-50% is probably the best you will do. For practices in this condition it would be easier to move their practices to a modern facility that could absorb their practice. They would get compensated by that facility the 40-50% that they would get trying to sell their office. And typically, these facilities would be more flexible with the seller staying on to work as an employee for either a longer or shorter period of time.
In the Toolbar at the top of every page on this website is our informal Valuation Tool. Click Valuations in the Toolbar and it will guide you through an informal Valution of your practice that you can do yourself and takes no more than a couple of minutes to complete and get your quote
I hope I have answered some of your questions. If you have other questions please contact me at your convenience. I am available to meet with you at your office for a free consultation. I do confidential practice sales for dentists who desire that confidentiality. And unlike most other brokers I do not charge the buyers a fee. Before you sign with another broker ask to see the buyer contract as well as the seller contract they are anxious for you to sign. Many buyers who are interested in your practice will not sign these contracts and you will lose a potential buyer. Buyer fees also diminish what a buyer will offer for a practice because they are building that buyer fee into their true cost to buy.
I can do a formal Evaluation for your practice if you want to sell it on your own.
by William J Lossef DDS