What Do You Think Your Practice is Worth?
Megan Urban, Practice Transition Advisor at Omni Practice Group, explains why it is a good idea to get an understanding of what your practice is worth 2-3 years before you plan to sell.
It’s All in the Numbers
As you close out this past year and reflect on the first full year without any shutdowns as 2020 brought us, it makes sense to step back and take a look at your numbers. This is the case whether you are in your first year of practice ownership, have owned your practice for ten years, or you are getting closer and closer to retirement. You should always be managing your practice to your numbers while keeping the number one goal of taking care of your patients to the best of your ability.
So that all sounds great, but how do you manage to your numbers? The first step is grabbing your Profit and Loss statement and a Production by Provider or Production by Procedure report for 2020. If you know Microsoft Excel, you can input the numbers into an Excel spreadsheet. If you don’t know Excel, you can grab your handy-dandy calculator.
Most numbers you manage to are calculated based on a percentage of your gross collections. That’s the top number on your profit and loss statement. You should take the number after returns or other credits to gross revenue. Some Profit and Loss statements may call this number Profit and others will call it Revenue.
The first number to look at is your staff expense as a percentage of revenue. Add your staff salaries, payroll tax for staff, and staff benefits. Divide that total by revenue. Your target should be about 25% of revenue. If you’re slightly above 25%, don’t worry, increasing collections while keeping staff salaries flat will help you improve this number. If you’re over 35% and you really don’t think you can improve collections, you should analyze your staff. Maybe you have too many, or maybe your staff that is overpaid. These days, it’s easy to overpay staff since they’re hard to come by. Time and time again, when we look at practice numbers, this is one of the biggest profitability killers.
The next number to look at is facilities expense as a percentage of collections. This includes your base rent plus any of the common areas that you pay for and other facilities expense – garbage, parking lot maintenance, etc. This expense should not be more than 7% to 9% of revenue. If you are significantly higher than this number, you are not maximizing your facility, overpaying on rent, or you have too big of space for what you need. You can either increase collections or decide to downsize your space, sublease space, or do something else that will help get your numbers down in the 7% to 9% range.
Dental Supplies expense is something else to look at. Divide Dental Supplies expense by revenue. The target is 6% of revenue. If you’re a few percentage points off, don’t worry about it. If you’re at 12% to 15% or higher, you may have supplies walking out the door, overstocking your supply cabinet, or you’re buying top-end products. This should be a quick fix if you have a meeting with your person that orders supplies and give them a budget.
Lab expense is similar to dental supplies. If you’re a basic crown and bridge practice, you should be at 7% to 9% of revenues if you don’t use a milling machine in-house or you don’t place a lot of implants. The latter two will skew the numbers. Negotiate with your lab if you are higher than 7% to 9%. If you’re with a high-end lab, you’re at 12% and love their work, don’t change labs. You’re only a few points off. You can make up the difference elsewhere.
The other quick measure is hygiene as a percentage of total collections. Take your Production by Provider report or Production by Procedure report and figure out how much of collections are coming out of hygiene as a percentage of total revenue. The target is to be above 30% of revenue coming from your hygiene program. If you’re in the low 20% or less and you have a general dental practice, you should take a look at your hygiene schedule and see how many patients they’re seeing per day. Maybe their schedule isn’t full, or maybe hygiene is booked out for several months and the hygienist can’t keep up. You will need to analyze this for yourself.
Looking at your numbers is something all business owners do to help them manage their practice. These are a few simple numbers that you can quickly measure a few times per year, make a few changes and you can get your overhead down below the national average of 65%. Best wishes on the New Year and may your overhead be under control.
Read MoreWhy Practices Don’t Sell
By Megan
Your practice has successfully worked for you for many years so why isn’t it selling? It could be the transition consultant (broker) you are using, or it could be your practice.
Working with an experienced transition consultant is important. We know where and how to advertise. It doesn’t work to simply advertise on a website. You will want marketing and advertising in schools across the country, dental journals, and county/state societies. An experienced consultant already has a list of potential buyers for your area or type and may have other creative grassroots ideas to find the right buyer.
The right consultant cares about you, your team, practice, and goals. It shouldn’t be just about the commission money. Your consultant should be responsive and professional to potential buyers and you.
A comprehensive valuation and prospectus are important. If you or your consultant price your practice too high, it can be offensive to potential buyers, and they won’t feel comfortable offering a lower price. Even if you find a buyer willing to overpay for your practice, the bank will not finance 100%, which means you have to become a bank for a specific amount of the purchase price.
Sometimes even when you have the right consultant your practice may have other reasons for not selling. Sometimes it’s simply not finding the right dentist at the right time. Often it is because your location is not desirable to new buyers and their families. Sometimes it’s the size of the practice. We all know 3 op practices can be very efficient and profitable, but many buyers want 4 to 6 ops, especially to add more hygiene.
Declining collections the last 3 years or simply low collections can be a deterrent to potential buyers and banks unless you have a reason. They understand more time off due to vacation or health issues. Low new patient count, too many PPOs with low reimbursement, and low hygiene production can be concerning to buyers.
Most buyers understand they may need to update style or equipment and technology, but if it’s a lot of cost and effort, they may keep looking for a better practice.
If your practice falls into any of these areas of concern, it will take more time than the average to sell. Lowering the price may help, but if there is no interest, it’s not the price that’s the problem. Don’t give up or get mad, just understand that while your practice may have been perfect for you, it can be a while to find the right buyer.
Advice for Dentists Who Are Thinking About Selling Their Dental Practice
For Dentists who are considering a practice sale – Here is some advice from an experienced Practice Transition Advisor – Megan Urban, Omni Practice Group.
Read More
Getting Your Practice Ready to Sell
You are ready! You woke up one morning early last week and said to yourself, “It’s Time!”
You have loved being a practicing dentist. But for a multitude of possible reasons, you are ready to sell. So, what’s next? You look around and think is my practice ready to sell? All of a sudden you see the chipped paint and remember the door that sticks if you don’t open it a certain way. Not unlike a house that you are putting on the market, some quick accounting of your practice is in order. Unlike a house, big and costly upgrades will not net you a higher sales price. So, let’s talk about what is a great bang for the buck and what may be money thrown out the window.
First, some really great things that don’t cost much. If your paint is chipped worn or aged… paint! Painting is simple, fast, and the quickest way to make a great first impression during the showings. Second, and advisably after the painting, upgrade flooring if it is worn or really outdated. For both of these options, go for smart clean colors. For the flooring options, keep it simple. Commercial carpet or carpet tiles and vinyl sheet or luxury vinyl plank (LVP) are quick to install and look great.
Second, fix all minor repairs. Doors that stick, duct tape on a hose, or worn fabric on chairs can be easily and inexpensively repaired and add to an overall feeling of a well-run business.
Third, declutter your entire office. It is time anyway. Put things you can’t part with boxes and get them out of the office. Otherwise, use your local goodwill and dumpster and let things go. Walk through the office as if you were going to buy this practice. You know that you would want to have clean, clutter-free spaces to visualize your future dental life in.
Even if you choose to postpone your sale, all the things I have just mentioned should be done if they are needed regardless, so it is a win-win! Your staff and patients will love everything mentioned and it is an inexpensive boost to the whole business.
Notice what I didn’t include? That’s right. I didn’t include any expensive dental equipment upgrades. Much to the dental supply company’s sadness, new dental chairs and a cone beam are not a good investment if you are planning to sell soon. Do not buy a new laser or a CAD CAM machine because big equipment purchases, with rare exceptions, do not pay for themselves when a sale is imminent.
Ok, you are all set. Now what? Well, give a practice broker a call in the meantime to start the valuation process. A side benefit is that we are happy to come out to your practice and let you know what we see as the best things you can do prior to listing. Be ready for the answer to be that nothing needs to be done. If you look around and think “it looks pretty good here”, chances are we will too.
My door is always open for consultations at any stage of your practicing life. I am always excited to help you navigate the pathway to your new life’s adventures.
Read More