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How Much is My Dental Practice for Sale Worth?

When it comes to valuing a dental practice for sale, there are a lot of different methods and theories. In all honesty, there are so many variable factors that there is no one formula where you plug in numbers on one end and get an objectively correct answer out the other. But there are a couple of rules of thumb that can give you a good idea of a ballpark range. Realistically, you’ll need to work closely with your accountant, your dental practice broker, and, ideally, a certified valuation analyst (here at ddsmatch Southwest, we partner with Blue & Co. for our client’s valuation needs).

The two most common methods for valuing a dental practice dental practice for sale are to use a multiple of collections or a formula relying on your earnings before interest, tax, depreciation, and amortization (EBITDA). We’ll discuss each in turn and then discuss why these numbers will only tell part of the story.

Multiple of Collections

The multiples of collections method is fairly simple, until its not. The simple part is that it’s just a multiplication equation. You take your total collections (or gross revenue from the practice) and multiply it by a percentage. This, however, is where it gets less clear: what percentage do you use? Historically, the average answer has been about 67%, although you will also hear this should be 70-80% of the average of your last three years collections. Another way to consider this approach is the price to gross revenue. That is, what will the buyer be willing to pay for each dollar of collections? $.67, $.70, $.75, or $.80?

Our use of the word “historically” should be telling. This method of valuation is become less common as the business side of the dental industry changes (more on this in the next section). However, before you get too excited about the simplicity of this method, consider the following hypothetical: if you have a practice will $1m in collections, using a multiple of collections method, the practice could be valued reasonably within the $670,000-$800,000 range, depending on other variables. The problem here is you are only looking at one number, the total collections. You don’t have any information yet about overhead and other costs. This hypothetical dental practice for sale could actually be worth much less.

EBITDA

The earnings before interest, tax, depreciation, and amortization (EBITDA) is becoming increasingly popular as the business side of the dental industry has experienced a shift towards a greater number of group practices being driven by entrepreneurial dentists and outside investors. With group practices being more and more focused on investor returns, there is a shift to an investor perspective of owning and operating dental practices. Typically, investors consider the actual debt-free cash flow, rather than gross collections, as the most reliable indicator of the likelihood of a return on their investment. The EBITDA method can be considered a price to earnings method. The question here is how much is the buyer willing to pay for each dollar of free-and-clear net earnings?

This method is trickier because determining your debt-free earnings is not as simple. Also, the range for the multiplier for EBITDA is much wider (you can see anywhere between two and 18 as the correct multiplier) and more variable by practice type. For a solo practice, a reasonable multiplier might be three-to-four times. For a multi-doctor practice, in might be four-to-five times. For a multi-location practice, it might be five-to-six times. And for a group practice with infrastructure and scalability, it could be six times and up from there.

When we apply the EBITDA method to our above hypothetical, you can see both the difference and the advantage of this method. If a dental practice for sale has $1m in collections and 60% overhead (which is about average for a dental practice), its EBITDA is $400,000. But, what if a practice has an above average amount of overhead? If a practice has $1m in collections but 75% overhead (if, say, the practice has more employees than it needs or the doctor pays themselves a hefty salary), the EBITDA is only $250,000. The multiplier of collections would place both practices at the same value, however, the second practice is clearly worth less than the first.

The Rest of the Story

There are two major factors that are not accounted for in either of these models. First, as mentioned previously, there are all kinds of variables that impact value outside of the information used in either of these valuation methods, including:

  • Location
  • Product mix
  • Payer mix
  • Fee schedules
  • Referral rates
  • New patient acquisition
  • Fixed assets
  • Whether office is leased or owned
  • Cosmetic appearance of the office
  • How modern or well-maintained is the equipment
  • Availability of financing and current interest rates
  • Transition plan (whether seller will stay on for a period)
  • Community goodwill and how well that will translate to the buyer

All of these things will impact the value that both the buyer and seller will place on the dental practice for sale. Which brings us to the second factor: market value. At the end of the day, a practice is worth whatever it can bring from an open market. All of the valuation methods are simply ways to try and reach an agreed upon range from which negotiations can start.

We Work for You to Get What You Want for Your Dental Practice for Sale

Here at ddsmatch Southwest, our goal is to help you meet your dental practice transition goals and get a deal that you think is fair. As part of our Trusted Transition Process, we work with you by discussing the current local dental practice transition marketplace, help establish the best transition options for your practice, and suggest improvements and investment options that will result in a real return in the sale. Contact us today for a free, no-obligation Practice Transition Assessment.

Considering DSOs and Private Equity Groups When Putting a Dental Office for Sale

In the world of dental practice transitions, there is a lot of talk these days about the increasing role of corporate dentistry. If you are wondering whether you should consider these options as you put your dental office for sale, it’s important to understand what these options are, what they aren’t, and how they are different.

Dental Service Organizations

Dental service organizations (DSOs) are management companies which own and run multiple practices. Examples include Heartland, with over 800 locations across 36 states, and Aspen Dental Management, with more than 650 locations. A DSO will have their own methods, meaning they’ll have a management organization, fee schedule, staffing requirements, and other business tools that they’ll want to impose on your office. Uniformity is part of the key to success, replicating the functioning of one office across many. If they have a good model, theoretically, a DSO can smoothly run a practice from a business standpoint and not get in the way of providing quality care.

If you sell to a DSO, you become an employee. This can be a good option for a dentist looking at retirement, but not quite ready to give up the game. You can still provide treatment for your patients, receive a salary and benefits, but not have to deal with as much of the business or administrative side of things that takes up your time after office hours. If you are looking to cut back hours or responsibilities, this can be a good option.

If your concern is getting the most money out of your practice, a DSO can similarly be a good choice. A DSO will have deeper pockets and easier access to more financing than a private buyer. And, given that a DSO typically has a long term goal of expansion into additional markets, seeing the gains from their economies of scale, they may be willing to outbid private sellers.

The downside may be your legacy and possibly losing the goodwill of your patients and community. You’ve worked all of your career to build a successful business. If you use a dental practice broker, such as ddsmatch Southwest, when you put your dental office for sale, we use our expertise to help identify a buyer with a strong skill set and personality match that will carry on the practice and legacy you have worked so hard to build.

While a DSO is staffed with real people, who care about the treatment they provide, their doctors are merely employees with a limited ability to respond outside of the corporation’s practices and policies. How much this is an issue is a personal determination that will vary from practice to practice. If you want to consider offers from DSOs, you are still well-advised to retain a dental practice broker as the issues that arise in the sale to a private buyer are mostly the same as the ones involved in selling to a DSO.

Private Equity Groups

By contrast, private equity groups typically don’t buy practices, they invest in them. Private equity groups are investment management companies that provide financial backing, as an investment tool, in either startups or operating business. A private equity firm generally doesn’t have an interest in being involved in day-to-day operations. Rather, they are looking for a return on an investment.

A common mistake people make when thinking about private equity investments is believing that the investor is looking for a return from the practice’s existing cash flow: that the investment is given in return for a percentage of the current earnings. If that were the case, private equity investing would not be a good investment tool. Why would you need an investor if you already are making enough profit? Private equity investors are not satisfied with your practice’s status quo. Rather, the investor sees an opportunity for growth and wants you to expand your practice with their equity.

Therefore, rather than selling your practice, you are, in effect, becoming a manager of the private equity group’s investment. Their investment gives them leverage over you to expand your practice. If you are looking to expand, this can be a good way to do it, rather than financing through a bank and increasing your debt load. You can greatly increase the value of your practice, the return on which you will reap when it does come time to sell. If you aren’t interested in becoming a business manager over a group of practices, then private equity investing is not a good way to go.

Currently, there is a merging of DSOs and private equity, with investors seeing DSOs as a field ready for harvest. In March 2018, Heartland Dental announced that a private equity firm had acquired a 58% stake in the company, in which it was valued at $2.8 billion. Other private equity groups have made investments in DSOs, but the jury is still out on whether Heartland Dental will be “a kind of Walgreens for the dentistry business” or whether the company is overvalued and overleveraged.

Is it a Good Idea to Sell to a DSO?

Again, this comes down to some very personal choices that must be carefully considered when you put your dental office for sale. While the ADA put the number of doctors working in DSOs at about 7.4% in 2017, it noted that for younger doctors (ages 21-34), that number jumped to 16.3%.  Doctors are leaving dental school with unprecedented amounts of student loan debt, which can make banks worry about financing for the purchase of a practice, especially when the doctor is lacking hand speed and production capabilities that only come with time and practice. The bank wants to make sure it gets its return, too. Young doctors are finding a safe bet is to join an existing practice to gain that experience, and DSOs can give them that time while offering a potential to build equity in the practice.

On the other hand, DSOs have gotten themselves into trouble with practices that indicate they may be more concerned about their bottom line than responsible treatment and ethical practices. Earlier this decade, a U.S. Senate investigation determined that some DSOs were providing unnecessary treatment to children to collect more from Medicaid. Also, early last year Benevis LLC, which operates Kool Smiles clinics in several states, settled with the U.S. Department of Justice and paid a fine of $23.9 million plus interest for submitting false Medicaid claims.

ddsmatch Southwest Can Help You Get What You Want When You Put Your Dental Office for Sale

At ddsmatch Southwest, we take the experience of hundreds of successful dental practice transitions from all across the country and put it to work for you. As seen here, there are a lot of tough questions about how to get to where you want to be when you put your dental office for sale. We can help you review your options, look at the benefits and drawbacks of each, and offer unbiased advice about what choice is most likely to get you to your goal. Our definition of a successful deal is not just one where papers are signed and money changes hands. It’s one where the parties walk away happy, feeling like they got a good deal. Contact us today and find out what we can do for you.

Are You Thinking About Selling Your Dental Practice? You Should Be

If you aren’t thinking about selling your dental practice, you should be. We’re not saying you should sell it now. Rather, you should be thinking about when that day does come and what you can do now to be better positioned to maximize your practice’s value. Here, we’ll discuss some things that you can do to start preparing, no matter where you are at in your career.

Start Planning Early

We all hope to be able to retire on our own schedule, but life often has other plans in mind for us. Should you become ill or injured, should you fall prey to a repetitive motion disorder, you may find the time to sell your dental practice arriving sooner than you think. And while we are not advocating you should assume the worst, the fact is that dentists who are compelled to sell their practice on a short timeline (less than one year) are more likely to get less than the actual value of their practice.

Conventional wisdom puts planning for a dental practice sale at a minimum of between two to four years. Here at ddsmatch Southwest, we say that if you think you are five years or less out from retirement, it’s a good time to have your practice evaluated by an outside consultant who can advise you on any changes or upgrades that will bring you a return in the sale. For doctors in that five year range, we offer a free, no-obligation Practice Transition Assessment.

Starting early has a couple of benefits. First, you need to realistically consider how long the transition will take. It’s not just about doing a bit of spit-and-polish, signing papers, and handing over the keys. Depending on your practice and the buyer, you may want (or need) to stay on for a period to help the buyer transition into the practice. If you’re counting the days until you can spend your days on the golf course, keep this in mind.

Also, some of the upgrades you may need to make for your practice to be reasonably attractive to a buyer may take time to implement (if you have issues with your patient base) or to make profitable (if you need to upgrade equipment or software). If your upgrades are expensive, or require a learning curve, you need sufficient time before they stop costing you money and start earning you money.

Don’t Mentally Retire Before You Actually Retire

The closer those last days or weeks or months get, the more tempting it may be to start easing into retirement. Don’t. When the buyer’s bank assesses the value of your practice, they aren’t going to rely on numbers that are five or ten years old. They want to know what the practice is earning right now and in the recent past—one to three years. If you’ve started cutting your hours, referring more work out, cancelling insurance plans, reducing the number of patients, or doing less marketing, you run the risk of devaluing your practice.

Know What Gives Your Practice its Value

This can be summed up in three simple words: active patient records. A nice clean office with up-to-date and well-maintained equipment and a pleasant, professional staff are all great things to have. But, in and of themselves, they have little value without a strong and growing patient base. Most importantly, you need to be able to show a steady stream of work for the 18 months prior to your valuation.

When you sell a dental practice, what you are really selling is you active patient records. This, along with your brand (the practice’s reputation and goodwill in your community) account for 75% or more of your practice’s value. These “intangibles” are by far your most valuable assets. Their value is increased when paired with an efficient business. If you have high overhead costs, you’ll get less than a comparable practice with a better cash flow. The buyer is going to look for a practice that can provide a reasonable income to cover their living expenses after servicing the debt of buying the dental practice. So, a strong active patient base plus good cash flow yields a better sale price.

Some other considerations on increasing cash flow and building value include:

  1. Raising Fees. Too frequently, older doctors are reluctant to raise their fees. Given that profitability is a major driver of a dental practice’s value, you must avoid making this error. Raising your fees each year may be the best way to guarantee increases in collections and profitability, which benefit you both immediately (more income that you get to keep in the practice) and at the time of sale (higher market value). Also, your buyer is going to want to have fees that are in line with the current market but not have to immediately raises fees after the transition, possibly driving away patients.
  2. Overhead. Keep a careful eye on all of your costs. Create a budget each year with specific amounts allocated for each overhead category. Be sure you are aware of current industry standards to make sure you aren’t overpaying for lab or supply costs. If your practice isn’t growing, you cannot afford to give annual cost of living raises. If this is the case, you may instead consider bonuses that are tied to increased collections. The lower your overhead, the greater your profitability, and, therefore, the higher your market value will be.
  3. Keep marketing. Just because you are retiring doesn’t mean your practice is going stop running. It might surprise you to learn how often doctors approaching retirement will cut back on marketing efforts or stop them altogether. As discussed above, the lending bank wants to know how your practice is performing right now and in the more recent past. You need your numbers to be on a consistent upward trend. A dip at the end will be a red flag that the practice has a problem. Also, make sure that you are keeping up with modern marketing trends. Your first efforts should be on referrals. But you should also update your website, invest in online marketing tools (search engine optimization, or SEO, to make sure you show up in online searches), and get patient reviews on Facebook and Google and post them on your own website.
  4. Update your office and technology. If you are closer to retirement (under two years) you can make cosmetic improvements to your office. First impressions matter (and ongoing impressions matter to your patients). If you have more time, you should consider your equipment and technology. Your buyer will likely be young and more familiar with the latest technology. However, you will need time with new tech to learn and become proficient. Once you do, however, it can bring you a return by increasing your patient flow and your treatment acceptance rates. These, in turn, will be reflected in your books as increases in profitability.

 

 

Think About the Impact of a Transition Plan on the Practice

When selling a dental practice, it’s common for the seller to stay on for a period of time. If your buyer is not already working in your practice (such as an associate or partner), this means the practice will have to support an additional doctor. You need to consider how that will impact cash flow and any existing practice debt, and whether you have sufficient revenue to support another doctor. The bank will certainly consider this when determining whether its willing to finance the purchase. These details need to be carefully considered but may be hard to predict, as what the buyer wants will impact how long you need to stay on, if at all.

ddsmatch Southwest Can Help You Sell Your Dental Practice

At ddsmatch Southwest, we bring the experience of hundreds of successful dental practice transitions, of all types and from across the country, and put it to work for you. We use that experience to help you identify a buyer with a strong skill set and personality match that will carry on the practice and legacy you have worked so hard to build. We ensure that every detail is covered, help you avoid common mistakes, and ensure no step is overlooked.  Plus, your confidentiality is always guaranteed. Contact us today and find out how we can help you meet your practice transition goals.

What to Look for & Look Out for in Buying a Dental Practice

Buying a dental practice will be one of the biggest—if not the biggest—decision of your career. It’s also the biggest risk, so it will pay, in both the short and long run, for you to be careful, get reliable professional advice, and do all of your due diligence. This is because, absent an ability to show fraud, once the practice keys are in your hands, there will be very little you can do about any overlooked details. And this landmark moment will cast a long shadow over your career.

Here at ddsmatch Southwest, while we represent the interests of our client, we view a successful transition as one where both the buyer and seller are happy with the terms and outcome of the deal. Most frequently we represent sellers (although we also have services for buyers and dental associates) but we think it’s important for those looking to buy a dental practice to know what they should look for, and what they should look out for, when considering a dental practice for sale.

What to Look for When Buying a Dental Practice

The Practice’s Financials

This might seem obvious, but it can also be complicated. It’s not just so simple as reviewing a profit and loss statement. You should expect to be provided with all recent financial statements and tax documents, along with the records of expenses for things like payroll, employee benefits, insurance premiums, continuing education, and reimbursements. You want to be able to know what percentage of collections is covering the practices overhead. That is, what does it really cost to run this practice?

The Practice’s Valuation

The seller will give you a number of what they think the practice is worth. You need to know how they reached that conclusion (the valuation method) and what are the bases of that valuation. Don’t be satisfied with the prior year’s cash flow, or a few recent years’ of cash flow. You should be prepared to review the entire history of the practice. That will tell you the whole story. For more on valuation methods, see our post “How Much is My Dental Practice for Sale Worth?

The Practice’s Brand and Goodwill

While the financial numbers are quantifiable, and easy to evaluate if properly recorded, the intangible assets—the practice’s reputation in the community and how closely it is tied to the selling dentist—are major factors in the practice’s overall value. This can be determined by looking at patient records which will show you patient retention, patient turnover, new patient referrals. These are indicators that the practice is viewed positively in the community.

Relatedly, when buying a dental practice, you need to know how the selling dentist intends to transfer that goodwill to you. This may or may not be something the selling dentist has thought about. It may mean that the selling dentist will want (or need) to stay on for a while to ease patients through the transition. How this works will vary from practice to practice. It’s a good idea to retain your own consultant or broker to help evaluate this and give recommendations of what will work best.

If the selling dentist is not retiring, you may need to obtain a non-compete agreement to keep the patients from being syphoned off.

The Practice’s Patient Base

In addition to what is discussed above, it’s a good idea to look at things such as the types of insurance the practice accepts and how many patients are with each plan, the patient demographics (older patients or young families, for instance), and how patients are retained. This information can help you project future cash flow.

What are the Seller’s Plans?

Is the selling dentist intending to stay on as an employee or contractor? If so, for how long? Does this match with your vision for the practice? While it is common, you should be wary of a selling dentist who may want to exert control rather that ease transition. However, if the selling dentist doesn’t want to stay on, you should consider whether you will have access to the doctor in case you need to consult regarding past patient treatment plans or accounts receivables.

What to Look Out for When Buying a Dental Practice

Pressure to Rush into Closing

While it may be understandable for a seller to be anxious, do not allow yourself to be rushed. Any step that is skipped will only run to your detriment, not theirs. It’s in your interest to be cautious and take the time necessary to complete all of the due diligence. A seller rushing you into buying a dental practice may be hoping that you’ll overlook a defect. It’s simply not worth the risk.

Seller Refuses to Disclose Information

If a seller refuses to make the requisite disclosures, or suggests you don’t need to see complete sets of records, or otherwise obscures information, it is likely there is something they don’t want you to see. While a dental practice can be a complex operation with legitimate issues of confidentiality, you have absolutely no incentive to overlook any detail, especially those being requested by your team of professionals (lawyer, accountant, business valuator, broker).

Declining Production or Poor Patient Retention and Recall

Sometimes selling doctors cut their hours in anticipation of the practice transition—looking forward to retirement, for instance. While this is not the best practice, it does happen. However, if there is declining production, be sure to determine the cause and make sure there isn’t a larger problem that you will be buying. The same goes for low patient retention and recall numbers. If you see this in the records, you need to know why. If the patients are going to another practice, you need to know where and why. You may want to ask the staff about this—often they have a good sense of patient issues. If the selling dentist won’t give you access to staff, that’s another red flag.

Employee Turnover

There are a lot of factors why employees leave (or are dismissed). But if the practice records indicate an unusually high turnover rate, it could indicate that wages are too low, meaning you may have to increase your payroll and benefits costs. It could also mean that the selling doctor is either poor at hiring or a bad manager. This can have an impact on the practice’s reputation and goodwill, if patients are having negative experiences with the staff.

Overreaching Non-Disclosure Agreements (NDA)

You should expect to sign an NDA before you get anything but the most basic information about a practice. For a variety of reasons, the selling doctor has a strong incentive to not let it be know the practice is for sale. However, if the NDA includes terms such as trying to establish an exclusive relationship with you as a prospective buyer or imposes an unethical requirement prohibiting you from looking at other practices for sale, you should not sign. When buying a dental practice, you need to keep all of your options open.

ddsmatch Southwest has Experience Matching those Buying a Dental Practice with The Right Seller.

When we look for the right buyer for our sellers, we consider your lifestyle and location goals, clinical skills, personality, and professional needs before we present you with a confidential list of sellers seeking to transition out of practice or bring on a new partner or associate. The ideal ddsmatch Southwest buyer candidate will have a comparable clinical skill set as the seller, associate experience, a desire to reside long-term in the geographical area of the practice, and requisite financial qualifications. If you are considering buying a dental practice in Texas or New Mexico, contact us today to review our extensive network of dental practices.