What is My Practice Worth?
By Megan Urban, Practice Transition Consultant
Have you ever said something like this? “In the 90’s I was producing over $1.5M. Five years ago I was producing $900,000. My practice must be worth at least $1.0M and this area has huge potential.” Value is not based on “long ago past” numbers nor “potential” numbers. Buyers don’t pay for what you did over 3 years ago nor potential. They have to put in the work for the “potential”, so they don’t pay you for that and most banks and appraisers look at the last 3 years.
First of all, production is not nearly as important as collections. In some offices, the two numbers might be pretty similar, but in many, there is a huge variance due to large insurance write-offs, any in-office discount plan, and uncollected production. Next, how much of your collections are you taking home?
Let’s talk about what your practice may be worth, potential action items, and who should assist you to value and sell your practice. It is one of the most important decisions in your life that impacts your income.
Gather your team of trusted advisors. Now is not the time to listen to friends and family that aren’t familiar with the dental industry and do not have many years of experience. You will want a reputable transition consultant (broker) and dental-specific CPA and attorney. Your transition consultant will have a list of dental-specific CPAs and attorneys that do much of the work in your area. The CPA will help you to maximize any retirement plan you have, reduce taxes, and pay off the debt in a way that makes sense for your specific situation. The attorney will ensure all sale agreements, non-compete, and re-do treatment is correct, as well as any work back or carry back documents.
To help with a simple and successful transition, ensure your financials or books are clean. Work with your CPA to ensure personal expenses are not being run through the practice. Know what your actual take-home is out of your collections. If collections are high but all expenses are high too, the value won’t be as high as you’d like.
Take a look at your AR and try to collect as much as possible and do any necessary write-offs. AR can be purchased by the buyer and the over 60 or 90 days old is not worth much unless you can show the patients are keeping up with monthly payment plans.
Most dentists don’t think they have many credit balances, but there are sometimes surprises here. Some credit balances may be correct and you need to do your due diligence to refund the money or better yet, finish treatment. Check that the credits are not an error. EOBs are difficult to read and an insurance adjustment may need to be modified or corrected. Credit balances are often adjusted directly off the purchase price.
So, how much is your practice worth? Your transition consultant will complete a full valuation and prospectus and then together you can set the price. If collections and/or income have been declining, that’s fine if you’re happy, just understand that buyers don’t pay for “old days numbers” and “potential”.