Earl M. Douglas, DDS, MBA, BVAL
If you’re like most people, you want to sell your assets at the highest price possible and buy assets at the lowest price possible, and that is how the market for any commodity is formed. When a buyer and seller finally agree on a price, we learn what something is truly worth, that is whatever someone will offer and someone will accept.
This tells us that buyers have a lot to say about what price something will sell for as they will be forced to pay more for the best situations because the demand for them invariably exceeds the supply for the best practice opportunities. There is a long line of prospects for our most ideal practices, while other practices have no line of prospects at all.
For practice owners who want to position their practices for the best price when the time to sell arrives, they should consider the top ten factors to improve practice value. These factors are not absolutes in how to maximize long term income and sale proceeds since some methods of increasing the price may not be worth the cost of making them. For instance, buying all new equipment may cost more than any price increase they might gain, but a significant equipment upgrade with used and refurbished equipment at a third of the cost might well increase price and marketability above the cost of implementing it.
There are some also factors that have an extremely large impact on the sales price, notably the demand for the location. If you want a very valuable practice, locate it in the nicest part of the nicest metropolitan area that is growing and thriving with new construction and new shopping and other amenities. Practices in areas such as this command the highest prices, especially if the supply is low and even if cash flow is not a robust as would be hoped. Dentists and their families want to live in the nicest places, so rule number one is be in a nice place. But if you’re not in the location of highest demand, this factor is not a variable.
While there are very important factors that we can’t change, it’s important to look at the factors that sellers have some extent of control over. It is critical that sellers examine these factors in context and determine how each one would affect the sale price and the cost of implementing it.
Curb appeal means the first impression a prospect has in visiting a practice. Is the practice appearance clean and modern, or is it dated and dirty. I took one seller into the front walkway to the front door of his practice. He always parked and entered in the rear, so didn’t know what the patients saw when they entered. What he discovered in the twenty foot walkway was a walkway covered with dead leaves, punctuated by bloody cotton gauze pads spit out by extraction patients. I asked him what he thought a new patient would think about such a first impression and he said he couldn’t imagine anyone even coming in the front door. And the same went for a prospective purchaser.
If a dentist’s building and sign have paint peeling off of them, it’s obvious that no one cares about the outside, and such lack of caring would extend to every other element of the practice. In this case, there’s a big deficit to recover from by the time a buyer even enters the office. I have found that many times it’s helpful for a dentist to have a friend who isn’t even a patient of his to come to office and walk around and through it and offer their honest opinion. If a dentist sees that stained carpet and dirty walls so many times that they don’t even notice it anymore, then they are going to be at a real price disadvantage.
Take a critical look at the operatories and equipment. What do you see? More particularly, what does it look like in the eyes of a person looking at it for the first time? I think that many buyer prospects form a huge opinion of the value and desirability, if any, of a practice in the first five minutes they visit. The saying is true, ‘You don’t get a second chance to make a good first impression’.
Buyers, especially younger prospects who have not been out of school very long, expect and require modern up to date equipment. They were trained using modern equipment and they appreciate the productivity, safety, and ease of rendering the best treatment possible with up to date equipment. Old equipment is definitely a turn-off for buyers. The most valuable practices will be digital and real turn-ons will be 3-D radiography, CAD/CAM machines, lasers and the like. If a seller doesn’t have this technology, the price will likely be discounted to reflect the cost a buyer would have to spend in upgrading the equipment.
This factor is a big variable. If the equipment is ancient, it might well be worth an investment to make a significant improvement with just used and refurbished equipment. If a seller’s equipment is just moderately out of date, I suggest being prepared to make a price concession for a buyer to do an upgrade. There are two reasons for this. The first is that if a seller upgrades the equipment, it’s doubtful that they will recover the cost by any price increase. Secondly, whatever the seller buys would not be the equipment that a buyer would have chosen, so why not save money and let the buyer get what they specifically want.
The more flexible a seller is in the key terms of a sale, the more prospects they will have because a lack of flexibility on certain issues will disqualify a number of prospects. The main areas of flexibility are leaving or staying after the sale and of leasing or selling the building.
Some purchasers will want and need a seller to continue in the practice after the sale for a number of reasons. First there will be new dentist buyers who have never owned or managed a practice, and some who have not even been in practice. They will feel the need to have a seller, with their clinical and managerial experience, to keep the wheels on the tracks while the buyer assimilates experience in those areas to comfortably treat patients and manage the practice.
Secondly, there are mega practices that have such high productivity that a buyer could not produce the dentistry by themselves and that production would be lost without another dentist working with them, and the seller is the most obvious choice of associates.
Thirdly, in specialty practices where patient flow is a function of referrals from other dentists or professionals, a transition period is necessary to transfer the seller’s goodwill to the purchaser.
If a seller were adamant about either staying or leaving after the sale, they might lose half of the prospects looking at the practice, and with half as many prospects, offers for the practice would be expected to be lower.
The same logic applies to renting or selling the building. If the practice purchaser wants to buy the real estate and seller wants to keep it and rent it to the buyer, that prospect will go elsewhere, and again with fewer prospects, price offers would be expected to be lower. Many times practice purchasers feel that they cannot afford to buy a building and practice at the same time, but upon examining the cash flow, the monthly mortgage expense is often the same or even less than what the rent would be, making for a greater net income for buyers who also purchase the real estate.
New buyers know that the staff will be critical to their success. First of all, prospects want to know if there is chemistry between the staff and the buyer and vice versa. A sullen or indifferent staff can kill the prospects of a sale. Staff members usually make the largest patient impression of the practice from the way the phone is answered to how the patient feels about the office when they walk out the door after treatment.
A staff with a smiling face is essential. Staff must be competent and efficient in their jobs, and they need to work together and get along with one another. They need to be able to work with the practice software, bill insurance companies, collect money from patients, schedule appointments effectively, as well as effectively promote the practice. Hygienists need to be friendly and gentle, and especially be able to diagnose the need for treatment and express to patients what they see and why it needs correcting. Hygienists are frequently the gatekeepers to treatment and may sometimes be more influential than the dentist in getting patients to accept treatment.
5.Fee for Service or Managed Care
New buyer prospects universally seek fee for service practices. The ideal practice for these prospects would not participate in any insurance plans and would not even take assignment of insurance benefits, but would rather have their patients pay cash in advance for their treatment. We all know that in this day and age that such arrangements exist but that they are exceedingly rare. Practices that accept Medicaid are typically looked down on by many prospects.
This is not to say that a practice that accepts insurance and a small amount of Medicaid is not valuable or marketable, but sellers should review the plans they participate in and the amount of discounts they are accepting. There is probably not a practice that could stop accepting the lowest paying plans and still remain fully booked, and such reviews and culling of plans will make a practice more desirable and valuable in the eyes of purchaser prospects.
Practices that have had the benefit of management consultants and have implemented management systems are in higher demand, as well as higher value, by purchasers. Practices with systems that allow greater productivity with less stress will always be held in higher demand than practices in which the owner still micromanages all processes and staff members do not have a clearly defined purpose and way of measuring and correcting their own performance. Practices with the philosophy that it is the staff’s job to identify problems and take them to the owner for correction are practices in which the owner is subject to burnout, or at the least, high stress levels and spending time on problem solving rather than production.
Recall systems, tracking treatment plan acceptance, billing and receiving insurance payments, patient notifications, and the many other administrative tasks that can be automated or delegated are highly valued by purchasers whose goal is to be a dentist and not an office manager, so these assets will contribute to your practice value.
Buyers will place more value on practices with potential for further growth. Sometimes they will even purchase a sub-performing practice at a low price with the hope that they can grow it into a successful practice, a very bad idea by the way.
Practices with adequate production and profitability and the potential for growth will be viewed very favorably. Many times more mature dentists will reduce the various services that they offer, preferring to treat less children, not do endo, perio, and surgery and other items that they find less gratifying. Frequently this slow-down will spark the initiative of younger dentists who enjoy performing those services and many times buyers will see a spike in practice revenues as a result of doing them.
I’m not suggesting that you cut back on the treatments that you offer in order to demonstrate the potential for adding those services back in, but it may be helpful perhaps to take stock of what is and is not being done in order to accurately explain to buyers where growth potential exists.
8.Marketing and New Patients
Buyers always want to know how many new patients a practice generates. It has been estimated that a practice needs approximately new patients per month to offset attrition. More patients are needed for any actual growth, so examining new patient statistics is important. Marketing can be an important source for gaining those new patients, and practices with a system in place that effectively and cost-effectively attracts high quality new patients that are not just drawn for a free cleaning and exam can add to the desirability and value of a practice.
I frequently point out to buyers that the practice actually stimulates a small number of new patients, but the personal efforts of the owner generate the great majority of them. If an owner does not actively introduce and promote themselves everywhere they go, many potential new patients will fail to be generated. I’m always amazed at how few dentists even carry a business card with them, so meeting someone who needs a dentist means finding a pen and paper and writing on a scrap of paper.
One year when I was practicing I made over $100,000 of income from just promoting myself to the waitress who waited on me at a restaurant. Although she never came as a patient herself, her husband, a coworker, the coworker’s brother, mother, father, and neighbors came to me and were excellent patients. So in addition to netting a lot of extra income from the work, my practice value grew by $75,000, all from just engaging a waitress and handing her some cards at one dinner.
For owners with associates working for them, it is essential to have a contract with an assignable covenant not to compete and non-solicitation agreement with them. In cases where an associate does not have those agreements, the production that the associate produces, along with the associated hygiene income, does not belong to the practice owner, but to the associate. Competent attorneys and CPA’s will point out that the practice gross and asking price in cases where there are no covenants should not include the revenues attributable to the associate. Lenders are also reluctant to lend money to buy goodwill that doesn’t actually belong to the seller and that the buyer has no assurance of retaining. I have given sworn expert testimony in court that without a covenant and non-solicitation agreement that the associate’s revenue is not part of the owner’s practice.
One way, therefore, to increase your practice value if there is an associate working for you without a covenant, is to get a covenant in place. Sometimes, this is a challenge since associates may feel that they don’t need to give up that edge that they have and get nothing in return. In some cases, owners may need to consider terminating their associate and let the fallout occur, and determine what is actually left of their practice revenues. It is typically less of a revenue reduction in doing this than prospective buyers would project in their lower offers for the practice.
Cash flow is an important issue in practice valuation. Cash flow is simply a measure of how profitable a practice is, or how much of the gross revenues is left over after paying all of the necessary practice related expenses. My opinion is that most buyers are naïve on this subject and not all CPA’s and attorneys are expert in their analysis of dental practice cash flow. Lenders on the other hand are very attuned to practice cash flow and lending decisions are regularly made on the basis of it. Lenders will evaluate two practices with the exact same gross revenues and may approve one and not the other, because the net income is the most important statistic, not the gross income.
I consider a very telling statistic in evaluating practices – the percent net income divided by the income that is personally produced by owner. This statistic is somewhat different than the percent of net divided by the practice gross because several factors can act to make one practice actually twice as profitable per given amount of work than another. A practice should have a net of personal production of 52%. Lower percentages mean the owner is working harder for their money, and larger percentages mean the owner makes more net income with less effort.
Owners should consult with an expert practice valuator who can provide them with an accurate practice valuation and at the same time provide an in-depth analysis of the practice cash flow and efficiency. Adjustments need to be made to the data from profit and loss reports and tax returns to normalize the deductions that may not be actual expenses and to correct any income discrepancies. In addition to possible enhancements to the practice value, these corrections can also add to the owner’s net income while waiting for a sale to take place.
We’ve explained The Ten Things You Can Do, and for being such a great reader of this article, we’re adding this lagniappe. Lagniappe is Cajun for a ‘little something extra’. This lagniappe is a very valuable gift to all practice owners, being a form of free life insurance for their dental practice. By going to http://www.adssouth.com/Prepared.aspx owners can download a form that lists all information needed to value and market a dental practice. There is no need to do anything other than to compile this information and update it at least annually, and have it available for the dentist’s spouse to provide to whatever practice broker they might choose upon the event of the dentist’s death or disability.
In the event of a dentist’s sudden death, a spouse would not know what information to look for, where to look, who to call, or generally what to do. This all has to be done immediately while the spouse is grieving and making funeral plans. By the time the spouse figures out those issues, the price of the practice has plummeted because the practice of a dentist who has passed away is a very perishable commodity.
An important aspect of this process is bringing in a locum tenens dentist who can keep the practice active, but patients cannot follow them to a nearby office, as is the case when neighboring dentists offer to keep the office open for the survivor. Professional handling of these situations is very valuable in terms of outcomes.
Several years ago, we dealt with the passing of three dentists. In two of the cases, we were able to sell the practices at full asking price in cash within two weeks’ time. In the case of these practice, having all of the practice information on hand enabled us to start marketing the practices within twenty-four hours of being contacted by the widows. The third practice was handled by the widow’s attorney and did not sell until six months later when we were contacted to sell the practice at a huge discount.
It is much easier for a living dentist who knows where all the information is that needs to gathered rather than for a grieving survivor who has no idea of where to look and what to do. It is a true gift to give a survivor, saving them all of the stress of trying to figure out how to liquidate a practice in the most difficult times they will face.
In addition to making a practice much, much more valuable, in many cases $250,000 or more, the owner’s legacy can be preserved as well, the staff’s careers, and patients’ ongoing care are also assured.
We have covered ten ways to add to the value of your practice, with a very valuable bonus tip. Hopefully you will use this information to your benefit, and when you are considering making a future transition, call your local ADS Transition specialist for help in getting the best results for your transition.
Earl Douglas, DDS, MBA, BVAL ADS South, LLC 770-664-1982 firstname.lastname@example.org