By Susan Spear
From the Winter 2017 Journal of the Colorado Dental Association
When a buyer chooses the right dental practice for their future, they consider income and expenses, cash flow, practice statistics, location, office space and size, lease, equipment, patient demographics, and the availability of quality practices on the market. Which of these characteristics is most important when purchasing a dental practice? All of them! One factor does not equate to value or success.
One characteristic that may be confusing is understanding practice overhead. Be cautious about using a percentage of overhead that has not been analyzed and explored to determine value. Unreasonable guidelines such as “all dental practices should operate at a 60% overhead” use off-market arbitrary information and methodologies that can prevent a buyer from obtaining a great practice.
According to the 2016 “Business Reference Guide, The Essential Guide to Pricing Businesses and Franchises,” the national average overhead for a general dentistry practice is 65%. This percentage defines a well-run dental practice and is used as part of determining value or selling price. It further reports that the average collections for a general dentistry business is $500,000. What if the income is higher or lower? Do the same percentages apply?
If the seller is working with a qualified broker/business intermediary, the buyer should see a recast of financials for a new owner where the expenses have been appropriately applied to the income. These adjustments are sometimes called “add backs.” These add backs should be defended using realistic market practice operating metrics. It may be that the overhead calculations are not complete or there is a realistic reason for the practice operating at a higher percentage. Using the principle of lowering overhead can (at least short-term in some cases) increase cash flow. However, it can also hinder many dental practices and their growth long-term. A potential buyer could be a penny wise and a dollar poor!
No two practices are equal when determining value. Overhead is important to a buyer, but there is much more to consider when purchasing a dental practice and determining purchase price. Quality dental practices may operate with a higher overhead because they occupy better space with greater leaseholds. They may employ quality staff who deserve respective incomes. They may update their office with new equipment and technology for patient care. They may also refer out many procedures that could generate more income in-house for a new owner, thus decreasing overhead. Other factors such as the payor mix of the patients and how collections are managed should be considered.
If overhead were the only factor in determining value, then sellers would just plan on selling their practices with the bare bones. Fortunately, there are proven standard industry guidelines to measure and demonstrate value/selling price.
When making the choice to purchase, here are 10 important areas with questions that buyers should consider:
- Where do I want to practice (not only what state, but where in that state)? What city or town? What part of that city or town?
- What size facility do I need? If it isn’t currently the size I want, can it be modified or moved someday?
- Do I want a practice where I don’t have to make many changes or do I want to build a practice forward?
- Do I need a high-end style office space or can I work with a space to make it what I need for my future practice?
- Does a quality dental staff and operations matter to me? Does the current practice philosophy or philosophy of care matter to me?
- Do I need state-of-the-art equipment from the beginning of my ownership or can I replace and upgrade over time?
- Is the current income of the practice enough to cover my debt service and expenses? If not, what is my business plan?
- What can I bring to the practice to improve its growth or income? Will I lose income if I cannot complete the procedures of the current owner? Will I gain income with what I keep in-house?
- Do the patient demographics fit my practice goals? If not, can I make some changes that will modify the practice profile?
- WHAT IS THE AVAILABILITY OF THE PRACTICE THAT MEETS MY NEEDS? WHAT IS MOST IMPORTANT TO ME?
Purchasing a dental practice is an exciting time in a dentist’s career. With the proper approach and knowledge, you will be in the practice of your dreams in no time!