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Tuesday, February 11th, 2020 | by

Price – It’s Not What It’s Cracked Up to Be

I’m currently doing an analysis for a client who will be selling his practice. It’s rare that someone who has been offered 120% of their gross income for their practice and an offer to work for five years after the sale for $350,000 per year would bother to ask if that was a good deal or not, but this dentist did. Here’s the statistics of this actual real-life practice and that offer he received.

 

Price Offered 120% of gross, cash at closing $4,200,000
Five years of commission at $350,000 per year $1,750,000
Stock $250,000
Total Revenues $6,200,000

 

So what is there to think about? Just grab the money and run, right? But on the advice of his sage accountant, he called me and asked, “Earl is this really a good deal for me?” I told him it depends. Compared to what? Comparing this delicious offer to an alternative option, that of keeping his practice for the next five years and then selling it for $2,900,000 or 75% of his gross to a buyer who wouldn’t require him to stay on. And he could retire. Let’s take a look at this seemingly less attractive option.

 

Practice Price  75% of gross, cash at closing $2,900,000
Five years practice net income $6,900,000
Total Revenues $9,800,000

 

Now I do realize that an extra $3,600,000 may not mean a lot to some dentists, but for those it does, we should understand how the difference came about. It’s obvious that the sale price in the wait-to-sell option is considerably lower, however the seller earns over $5,000,000 more net income by working for himself instead of someone else. This owner currently nets 54% of his personal (not the gross) production and the buyer’s offer was only 15%, providing they did not load him up with extra work from new managed care plans, thus making that percentage lower.

There are great bragging rights by selling your practice for 120% of gross, but understand that it is the seller paying that price, not the buyer.  By the way, these results are consistent with practically any size practice, not just this mega practice.

So, the takeaway from this little story is don’t be flattered by high price offers and bamboozled by terrible terms.  It’s always a good idea to seek expert guidance in reviewing critical options before finding out the hard way that price is not always what it’s cracked up to be.  Remember it’s the bottom line that sellers walk away with, not the top one.

Earl M. Douglas, DDS, MBA, BVAL is principal of ADS South, LLC. The firm provides consulting, valuation, analysis, partnership and brokering services.
www.adssouth.com
770-664-1982
earl@adssouth.com


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