Transitions Roundtable

We ask two experts the same question to give you two different answers on a complex issue

QUESTION

"One of my classmates just sold his general practice and told me he received 75% of 2012 collections. That seems high to me, as I thought most general practices are valued between 60-65% of last year's collections. Can you please clarify?"

Gary Schaub

The answer lies in the details. Almost every time the 60% to 65% of annual collections value is quoted, the complete picture is not given. Just as you can't see the foundation of a home, most dentists do not know that over two-thirds of dental practices actually sell for 40% to 80% of annual collections. This means that the actual sale price of a typical practice collecting $800,000 per year can range from $320,000 to $640,000. This is a swing of up to $200,000 from the value determined by a Rule of Thumb method. There is no such thing as a typical practice – every practice is unique and needs to be valued in that manner.

In my Dental Economics (January 2007) article titled "Maintaining Practice Income and Value," I compared two similar practices that each had annual collections of $1,700,000. One practice had an appraised value of $1,209,000, the other $956,000. The higher valued practice was appraised at 71% of collections, the lower one at 56% of collections, thus there was a swing of $253,000. Did you notice that both practice values fell outside of the Rule of Thumb valuation technique? Why did this happen?

You probably think that the higher valued practice had brand new equipment and a newly remodeled facility. Wrong. The value of the tangible assets for this practice was actually only $206,000 vs. $477,000 for the lesser valued practice. The key element was the overhead of the practices. One had an operating income (cash flow profit) of $782,000, the other $476,000. Thus, the owner of the high valued practice had over $300,000 of extra cash flow due to the practice's lower overhead. The value of goodwill accounted for the increase in value for the higher valued practice.

The key to a successful transition is a comprehensive, accurate practice appraisal. Build a successful transition on a foundation of facts, not guesses. The financial payoff can be incredible.

Gary Schaub is the founder of HELP Appraisals & Sales Inc., a dental and medical appraisal and brokerage firm in Portland, Ore. He is a member of American Dental Sales and can be reached at (503) 223-4357.

Tom Snyder, DMD, MBA

For years, there has been a myth throughout the dental profession that general dental practices sell between 60-65% of last year's gross collections. This, of course, is a generalization, as practice values do vary greatly around the country. Your classmate is quite fortunate in getting 75%, as general practices in urban and suburban areas are selling at a "premium" today compared to a few years ago. There is one major reason contributing to this. According to the ADA's 2010 Survey of Retirement, it was reported that more than 39% of dentists delayed their retirement plans. Obviously, the Great Recession played a major role in that decision. In fact, recent surveys show that less than 2,000 dentists are surrendering their licenses annually, so that means many dentists are still practicing, albeit on a part-time basis. However, the number of dental graduates is now close to 5,000 per year. So if fewer doctors are retiring and more dentists are still practicing, the number of practices for sale has become a real issue in recent years. To make the problem worse, approximately 90% of recent grads desire to practice only in urban and suburban areas. So, if you understand simple economics, it is obvious that an over-supply of young potential purchasers exists in urban/suburban areas. Therefore, when a good practice goes on the market in those areas, demand is great and prices soar! Reports vary, but today the values of general practices can vary in many urban markets between 70% to 80% or even 90% of last year's gross receipts in a few locales, based, of course, on location. So, if you practice in an urban/suburban market, chances are you'll receive a good price value for your practice, provided that your practice is profitable, has some technology, and shows steady growth. Conversely, if you live in a small town or rural area, the chances to sell your practice are becoming more difficult. If you are fortunate enough to find a purchaser, expect practice values between 50 to 60% of last year's gross receipts.

Tom Snyder, DMD, MBA, is the director of transition services for The Snyder Group, a division of Henry Schein. He can be reached at (800) 988-5674 or [email protected].