Many of us have unrealistic expectations about how much our possessions are worth. Houses, cars and toys are examples of things we all know fall into this category. But, what about your practice?
Rarely does a day go by that I don’t talk to someone about how much his/her practice is worth. The majority of dentists think his/her practice is worth more than it is. Why is this? Part of it can be attributed to the fact that in most parts of Canada, we have experienced fairly rapid growth in the value of dental practices. I also believe that the “endowment effect” can be a factor since people, at times, tend to ascribe more value to things simply because they own them including their dental practices. This may create a dangerous situation for sellers and buyers of dental practices as there is occasionally a disconnect between the sellers’ expectations and the buyers’ willingness to meet the expectations.
Rather than debate how much your practice is worth, it is more productive to look at the factors that create real value in a dental practice. Then, spend time enhancing or incorporating these factors into your practice to create value that buyers will see, appreciate, and happily pay for.
Let’s start by comparing practices on extreme ends of the spectrum: practices that enjoy high demand versus those with the lowest demand. Practices in highest demand are larger practices in a good location with a large patient base and modest billings per patient. They will have a good lease with no demolition clause, an up-to-date facility but not “over the top”, and a very strong profit margin. These practices will sell for the highest multiples which can be expressed as a multiple of gross or earnings or a combination of the two. They will likely receive multiple offers and the seller will be able to stay and practice as an associate on whatever terms they wish.
In contrast, practices which have much lower demand tend to be smaller practices in low visibility locations, with fewer patients and high billings per patient. Often, they may have a less desirable lease and tired facility with older equipment. The current owners may be quite happy in their practices and may make decent livings, however, these practices will not appeal to many buyers. When a buyer adds in the cost of paying back the loan to buy the practice and upgrading the facility, it is unlikely that the practice will provide the buyer with a good living. There is a common sentiment that “there is a buyer out there for everything” - I assure you that there are some practices that do not sell at any price.
So, how do you make sure your practice falls into the first category? First, acknowledge that not everyone has the skills to own a big dental practice (or wants to own a large practice). It is a lot of work and you have to have the right professional and interpersonal skills to manage it. Some honest personal reflection may help in determining where you fit.
Recently, we were engaged to assist a dentist who owns two practices with a combined 8,000 patients. His words when describing his treatment philosophy were “we are really pretty conservative, some of these people have been coming here for 40 years, we don’t over bill and treat them like family…the practices just seem to grow on their own.” He is obviously very humble and I’m sure his calm demeanor is a big reason in helping his practice “grow on its own”.
Aside from creating value as outlined above, what are the great intangibles in dentistry? Why do patients refer their friends and family to this doctor and not to the many other dentists in town? This dentist does not even have a website or any social media accounts but, despite this, the practices just keep growing! Sadly, there are no courses you can take to learn these intangible factors. However, you can glean insight from this particular dentist’s words, those of your colleagues and others you admire in dentistry. The key to building rapport with patients is how they are treated by you and everyone they interact with in your office. It is this rapport that evolves into trust which, in turn, creates referrals.
These intangibles are very easy to see when we prepare our valuations. The patient files are thick (if they’re still paper), thank you notes are plentiful, staff are paid fairly and stay around a long time, the principal dentist is happy and smiles a lot, there is no free whitening offered, the facility is clean and up to date, and the billings per patient are modest. Not everyone can have 8,000 patients, but by focusing on the factors mentioned above, you will begin the journey of creating your own MVP (Most Valuable Practice).