It’s certainly not unusual and completely understandable that these two words are often used interchangeably to describe the value assigned to an object. Maybe that object is a car, a head of lettuce, a baseball game ticket or even a dental practice. While we often assume the assigned value is always in dollars, maybe it’s defined by hours or even mental and/or physical energy. Interestingly, it can also be a combination of several standards of value. For our purposes here, we will be addressing the often-confused concepts regarding the value of a dental practice as it relates to its price versus what it costs. Understanding the difference may decide whether you own your practice or continue working for someone else.
There should be an asking price for every practice that is on the market but how that was determined is of valid concern. In many cases the number comes from a rule of thumb that someone read about in a journal or magazine article or in some cases just anecdotal conversations. If that is the case, the buyer has every right to be leery. For our purpose, our seller-client pays for a full appraisal of the practice in advance of the listing. Several different legitimate methods are used along with the database of sales data we have accumulated after 27 years and almost 300 sales. A running compilation of the last 25 arm’s length transactions confirms that we are usually pretty close in a sales price to appraised price comparison.
After completing the appraisal, we assist the seller in determining an asking price. Depending on the case, we may feel that price is the top of the market while in other cases a margin is added to account for either a rinsing market (such as we are now experiencing) or to let negotiations allow for supply and demand. Ultimately the seller sets the price as we don’t want to make the market. We just observe and compile the data. Notice that we have not yet discussed cost because that is the consideration the buyer must now give to the viability of an opportunity. While we don’t ever want anyone to just blatantly overpay for a practice (frankly, it’s bad for business), the price may be of only modest concern if the cost is manageable. If the buyer can pay the overhead, taxes, student loan debt and acquisition debt and still make a living in an opportunity that fits their career plan and geographic preference, then maybe the price is not so important. Let’s do a little math;
If the asking price is $400,000 for a practice in the area you want to serve and would be a good jumping off point for your career plans, should you walk away if the seller will not accept your $360,000 offer? The cost of this practice would be $4050.00 (10-year loan at 4% interest) for the asking price as opposed to $3645.00 to service your offer. In truth, you are not walking away from a $40,000 difference in price but rather a monthly $405.00 difference in cost. That amounts to about one porcelain veneer crown every other month. You can argue with the appraiser and seller but in the end, if you walk away, you lost out over half a crown.
Steve Wolff, UMKC Class of 1977
Try as I might, I can’t think of a better phrase than the trite admonition, “you only get one chance to make a first impression”, to describe a buyer’s first reaction to our listings. Naturally, we have prepared ourselves during the valuation process for discussions on these items but sometimes the answer to their questions can be uncomfortable. If you are considering the sale of your practice, be advised of a few of these early talking points:
- No Website. Right or wrong, younger buyers will try to get early information about the practice and with no website they may assume the seller is a dinosaur before ever seeing the office. This doesn’t have to be fancy and is not a hard or expensive problem to fix.
- Dated office décor and design. Buyers looking for a career opportunity seemingly have little interest in remodeling your office. Some things can’t be helped but at least be sure the office is clean, fresh and uncluttered. Yes, they will notice to old carpeting. Be aware too that ownership of the building is not necessarily a good thing.
- Inadequate revenues. There is no getting around the fact that today’s buyers need around $600,000 in annual collections to pay the overhead, taxes, student loan and acquisition debt in order to have something left over for living expenses. “Potential” is a hard sell and even harder to finance so don’t waste your time. If your revenues are not at a sustainable level, maybe another exit strategy is called for.
- Technology is expected and they will see those dip tanks. Modern buyers will not practice a day without digital radiography and increasingly, paperless records. If you are still a couple of years away from retirement, buy the digital hardware and software and enjoy the increase in productivity. If you are planning to retire at the end of the month, be prepared for a substantial adjustment to the sales price.
- Dated equipment is hard to hide. Make sure everything is clean, well maintained and free of tears and holes in the upholstery. This is actually a fairly easy category to fix as anyone that can fog up a mirror can buy all of the new equipment they want so to the buyers, be advised that unless we are talking about beat up, antique chairs and units, patients don’t care. Be careful how much you spend just to get that “new car smell”.
- The Staff can kill you. The first expense category buyers will focus on will be your staff costs. While it may be an asset to you to have long-term employees, we find that they are often at the top of the pay range and are sometimes being paid for days the seller is no longer working. Be careful with those automatic cost of living adjustments as the buyer may fear having to come in and “reorganize”.
Steve Wolff, UMKC Class of 1977
For most dentists, their practice represents the largest single asset they own outside of their personal residence. It never ceases to amaze me however the lengths some docs will travel to avoid paying for a legitimate valuation of their practice. Any shortcut or bargain basement special that comes along is often chosen, often to the eventual disappointment with the results. To that end, let’s discuss some valuable questions that might have been asked, followed by some key elements of a legitimate appraisal.
- This is the first (and maybe the last) question you should ask. Are you willing to go to court and testify to the validity of your report? Walk away if you get anything other than an unqualified YES.
- How many of these have you done? While everyone has to start somewhere, experience is a major factor in expert witness testimony as those proceedings lack the benefit of a buyer and seller negotiating a fair market price. If there is a possibility that the outcome of your case could rest on the conclusions of an appraisal, the best help in town will be cheap in the long run.
- What are your professional affiliations and what guidelines do you follow? While veterinary, optometric and chiropractic practices are similarly valued, dental practices have a unique set of circumstances that require the expertise of someone who is part of the dental practice valuation industry. In addition, adherence to a proven valuation model will produce consistent and defensible results.
- Have you published anything? While the “Publish or Perish” mentality of the Ivory Tower might be taking it to an extreme, the fact is that recognized experts are invited to submit content for text books and professional journals. While blogs can be little more of a free for all, textbook editing and the accompanying peer review can give you some comfort that the industry has vetted its authors.
- What valuation methods will be included in your report? We will discuss shortly some of the standardized methods but be wary of any “in-house” techniques that in the end are nothing more than putting your thumb on the scale and pushing down until you get the number you want.
- Have you ever valued, marketed, sold, secured financing for and closed on the sale of someone else’s dental practice? While a YES answer may still not be a satisfactory indicator, a NO answer almost certainly means that the valuator has no personal transitional sales data. By analogy, what real estate appraiser would issue a report on the value of a three bedroom suburban home without knowledge of what comparable three bedroom houses in similar neighborhoods sold for? While real estate transactions are recorded public knowledge that can be researched, dental practice Comparables come from the valuator’s personal experience. No local market sales means no local market data.
- Now that you have asked these questions, gone through the practice and financial analysis process and received the report, here are a few key things to review and understand.
- Was there a complete inventory of the office furnishings, equipment, supplies and instruments done by the valuator? While the values placed on used dental equipment can be somewhat arbitrary, there are industry guidelines as to the ratio of tangible vs. intangible asset value in order to secure financing for a sale. While the tax consequences of this allocation is a head-butt between the buyer and seller, market experience can provide a fair and reasonable number for these categories.
- NEVER trust a report that relies on some standardized multiple or “Rule of Thumb” as there is none. That rationale relies on at least two bogus assumptions. First is that the rule is applied to practices of all shapes and sizes when in fact practices with different revenue levels have historically sold for different percentages of gross collections. Secondly, it assumes that two practices with identical revenues, one being a rural Medicaid based practice and the other a high tech suburban office will sell for the same price. I can assure you that is not the case.
- Do not trust any method that focuses on the office Production. Since that number is one made up by the seller primarily for the purpose of being above any possible insurance benefit threshold, it is unreliable and in some cases, just wishful thinking. If you have had a hospital procedure done recently you have no doubt been amused by the difference between the amount billed for your procedure versus what was ultimately accepted and paid. Collections (aka revenues, deposits, receipts) are the only standard of measurement.
- I would be very distrustful of any report that focuses on a Proforma and/or a method such as the “Present Value of Discounted Future Cash Flow” (and its variants). While these kinds of projections can make a banker feel good about their loan, they make the assumption that practice revenues will climb at a consistent and steady pace over a long period of time. Just like in real estate (“Real Estate always goes up in value, except when it doesn’t”), purchasing a practice based solely on projected revenues can be risky. Just ask someone who relied on that information in 2007 to buy a practice. My guess is that they were disappointed in those projections.
- There is no single method of valuation that is acceptable with all practices. The Goodwill Registry, Summation of Assets, Capitalization of Earnings, Comparable Transactional Data and ultimately a cash flow Sanity Check should be included in the mix.
- Lastly, I would be skeptical of any report for which the appraiser did not make a personal appearance in the office.
A fair and accurate valuation can be the cornerstone of a retirement plan, transition strategy or unfortunately a property settlement. Hundreds of thousands of dollars can be at risk. The answer to Johnny Carson’s old game show question “Who Do You Trust?” should come down to educating yourself about the process, interviewing candidates for the assignment, being sure that you’re getting what you think you’re getting and not being afraid to pay for it.
Steve Wolff, DDS
UMKC Class of 1977
I have now been at home so long as a result of the Missouri quarantine directives that we are now able to actively plan our return to the world headquarters of ADS-MidAmerica. By the time you read this, we will be back in the office. We have continued to network, read, watch and listen to the industry about the business of post-pandemic dentistry and what the effects will be on values and marketability of dental practices. Will financing be available? Will it be a Buyer’s market or a Seller’s market? Is now the time or would it be better to wait for some “sign” that all will be well? The last part of this series; What would I be doing if I were a recent graduate or young associate may be the hardest to swallow but let’s put it out there.
The current pandemic may have placed you in the most challenging of all the categories we have discussed. The shutdown, followed by months if not years of recovery, leaves you in a difficult position to get a foothold on your career. Jobs have been lost and potential ownership opportunities with your current employers may have vaporized. The ability to purchase a practice may also be in jeopardy as practice acquisition lenders are having a little trouble finding solid ground to stand on. There is likely to be strong competition, even for practices on the market with less than stellar financials. Current student loans will not go away and future loan balances are probably going to increase. Profitable production, especially in highly competitive metro/urban markets, will be difficult with all of the necessary sanitation methods that must be part of the new protocols. In short, you couldn’t have picked a worse time to enter the profession.
Or a better one. Those that think creatively and look for non-traditional opportunities stand to be well rewarded. The need for dentistry will continue as long as people have teeth. The issue is not demand but rather, distribution and this is not the first time this has happened. A similar situation occurred in the ‘70s and ’80 as dental schools used a then-version of government Stimulus Money to build large capacity dental schools and to subsidize student fees. Imagine a semester tuition of $285.00 and a class size of 160+. Students, at first virtually all male, routinely graduated with less than $5,000.00 in student loan debt. Sounds too good to be true, right? The problem was that by the time Uncle Sam realized that their projections of the number of dentists needed to serve the extra population resulting from the Baby Boomers reaching maturity were off a little, an overabundance of new docs had flooded the workplace. Just how bad was it? New graduates held on to their old jobs as waiters and lab techs hoping to get a call to go work as a hygienist for a day. Clearly there was a distribution problem waiting to be solved.
Part of the resolution to that problem came when doctors began to realize that they all could not stay in Midtown and that there were opportunities outside of the Big-City limits. Travel around the smaller markets in the Midwest (or probably about anywhere in the country for that matter) and check out the diplomas on the wall. I believe you will find a large percentage of them were awarded in the ‘70s and early ‘80s. Opportunities were there and smart guys took them. Yes, they were mostly guys and we can devote a whole series on the shifting demographics of dental school grads and the portability of their spouses at another time. Suffice it to say that those docs are reaching the end of a 35-40 year career and are now ready for a successor. They have had great careers, raised their families and have been a huge asset to their communities, both personally and professionally. Here’s what I would be doing if I were a recent graduate with limited job prospects. I would be trying to meet some of these folks. Granted this is not for everyone and certainly job opportunities for your spouse may be limited but these can be great economic and professional opportunities that deserve a look. Maybe it’s time to look beyond suburban living. Maybe it’s time to get off of the corporate office treadmill. Maybe it’s time to breathe a little fresh air and practice with lower overhead, less competition and become a part of the local culture. That’s what I would do.
Steve Wolff, DDS
UMKC Class of 1977
Like many of you, I am soon to start my eighth week at home as a result of the Missouri directives. We are reading, watching and listening to the chatter about the business of post-pandemic dentistry and how this is going to affect the value and sale your practice. Part three of a four-part series, “what I would be doing if” I were a Mid-career Dentist will have a little different punchline than Part One or Two.
Let me emphasize again that technology is going to become much more important going forward as are demonstratively higher standards of infection control. Those that are behind the curve will find themselves with patients and even staff who are reluctant to come to your office. Until a reliable vaccine is found and made universally available, those who have endured weeks, if not months, of quarantine will be very demanding.
Here’s what I would be doing if I were a Mid-career dentist, regardless of whether my practice was Metro, Suburban or Rural. Unless you are compelled to relocate or recareer, you do not have time to call our office tomorrow morning or any other time in the near future as you need to get busy. With the myriad of confusing projections, plans, guidelines and limitations being suggested by the likes of the CDC, NIH, ADA and others, you should be spending every available hour planning how you are going to go forward in the best interest of your staff, your patients, your family and yourself. Golf games can wait as, after your family, you need to be taking care of your business.
- I would be researching negative airflow systems for my office along with any other proven air treatment equipment.
- I would be strategizing with my staff about aerosol spray management and surface cleaning.
- I would be trying to figure out how to safely treat enough patients in a day to be able to pay my overhead.
- I would be very thankful that a person of influence convinced me to have six months of emergency funds available in ready cash so that I can still put food on the table while we figure out how to get through a crisis.
- I would be remembering back to the waterline controversy twenty years ago and how we managed patient fears about a dental office being a dangerous place. To that end, I would be planning my marketing strategy to reassure patients and my community that we were a safe and conscientious place to come to.
- I would make sure that my membership in organized dentistry (read that ADA, State and local societies) was up to date and that I was planning to be an active participant. Maybe I don’t agree with every initiative but the sheer magnitude of this situation calls for strength in numbers. You need a voice at a high level.
- Lastly, I would remind myself that we are members of a privileged profession that has always enjoyed the respect of the community and that you are the backbone that will get us to the other side of this.
Not to worry, our company has been here 27 years and we’ll be here when the time is right.
Steve Wolff, DDS
UMKC Class of 1977
Now at my home office for the fifth week of the stay at home directives, we are taking in information daily about what the dental practice market will look like when offices return to daily operation. Will the value of my practice go down? Will patients have to be socially distanced in the office? Will repeated PPE changes be mandated? Once again the honest answer is, no one knows what is really going to happen but for those of us in practice after David Acer infected Kimberly Bergalis with HIV in 1987 will remember, infection control of blood borne pathogens became an all-consuming issue. There is no post-pandemic playbook or data set to refer back to but surely dental practices and their management of aerosols in the operatories will be part of a new normal.
We may be noticing a few early signs of how the world might work going forward and can draw a few commonsense conclusions about how all of this going to play out in the sale and transition of your practice. Part two of a four-part series will focus on “what I would be doing if” I were a Metro or Suburban Dentist.
As I noted in Part One, technology is going to become much more important going forward as are demonstratively higher standards of infection control. Those that are behind the curve will find themselves with patients who are reluctant to come to your office. Until a reliable vaccine is found and made universally available, patients who have endured weeks if not months of quarantine will be very demanding.
Here’s what I would be doing if I were in a Metro or Suburban practice and hoping to retire in the next three years…
- I would call our office tomorrow morning and schedule a meeting (probably still virtual for a while) to discuss a strategy for maintaining your practice and its value.
- I would quit listening to war stories and anecdotes from people who have very little, if any, experience in practice transitions. The tea leaves are suggesting that there is likely to be considerable competition among sellers who have decided that the time to hang up the handpiece has come.
- I would want to know how I fit into the market and what I needed to do to remain attractive to what may possibly be a large and hungry pool of scared buyers.
- I would want to know if my building could simultaneously be sold to the buyer of my practice and on what terms. Do It Yourselfers are going to have a hard time putting together an appropriate information package about their practice as, while some will not say enough, some will say too much.
- I would want to know what lenders are requiring of potential borrowers and if financing is even available for my practice and building.
As for me, I would want to be at the head of the line of opportunities in what will no doubt be a very interesting market over the next few years.
Steve Wolff, DDS
UMKC Class of 1977
Finding myself at my home office for now the fourth week of the consensus stay at home directives, we like everyone else are wondering what the dental practice market will look like when we get back to some new normal. The honest answer is, I don’t know. There is no post-pandemic playbook or data set to refer back to. Our company survived the Dot Com bust, 9/11 and The Great Recession but I believe history will show that those were minor bumps in the road compared to our current circumstances. We may be noticing however a few early signs of how the world might work going forward and some of those signs might well apply to us. Consequently, I’m going to pen a four-part series on what I would be doing if I were a;
- Rural Practice Dentist
- Metro or Suburban Dentist
- A Mid-career Dentist
- A recent graduate or associate Dentist
Events of the last month have indicated that technology is going to become much more important going forward. Churches are going to have to change. Business of all types will be exploring new models and service and delivery businesses will have to become tech centers. To name a few, healthcare, the auto industry, airlines, finance/banking and social networks are all going to change. Dentistry is going to need to make some changes as well.
If I was practicing in a rural practice (defined by prospective buyers in our market as somewhere more than an hour away from downtown St. Louis, Kansas City, Wichita, Springfield or Omaha/Lincoln), and looking to retire in the next ten years, I would be on the phone with ADS-MidAmerica tomorrow morning to schedule a face to face meeting to discuss a realistic exit strategy.
I might not hear what I would like to hear but at least I would want to know my choices.
- I would want to know about the necessary metrics for a practice to be a sustainable business for a new owner.
- I would want to know about the shift in buyer demographics in the last 40 years and what effect that will have on the likelihood of their being a buyer now and in the future. Interestingly, there may or may not be a buyer, but it may not be for the reasons I think. We may possibly be in for another shift in career plans similar to the ‘70s and ‘80s as young docs just might find the security of ownership is best enjoyed away from the big city markets. How and why could that be?
- I would like to discuss the difference between obtaining personal if not generational wealth as a result of ordinary income versus equity and capital gains. Even the IRS recognizes the difference so it must be meaningful.
- I would like to know if experienced help is available to assist me in transitioning my practice as things are a lot more complicated than they were when I went in business.
Frankly, not knowing the answers to these questions would leave me unsettled, relying on anecdotes and misinformation and wandering in the darkness of the post-pandemic world.
Steve Wolff, DDS UMKC Class of 1977
As we discussed in the last blog post, Steve Jordan of the PMAgroup, LLC penned a list of 36 questions for Dental Economics that a practice owner might ask themselves or prospective advisors about the sale of their practice. We took 10 and challenged you to see how you did. I’m sure you’ve been anxious to find out the answers.
- A classified ad in your local dental society publication will reach most buyers. T/F False. While friends and colleagues may notice, most buyers will never see a printed ad.
- What documents and metrics will you need to provide to buyers and their lenders in the form of a Prospectus? That’s a question for a blog unto itself as the answer is “way more than you think”.
- Why is EBITDA or Excess Earnings important to a practice valuation? It is an accurate measure of cash flow and profitability.
- A revenue multiplier is the best way to value a practice. T/F False. It is not an appraisal method.
- How did you determine that number? Someone either makes it up or refers to anecdotal evidence.
- How is a cap rate calculated, how is it used and what rate is typical? Capitalization Rate is used in conjunction with EBITDA to calculate a value for a business entity. EBITDA/Cap Rate = Value.
- Dental schools are a great place to find buyers for your practice. T/F False. Unlike the ‘70s and ‘80s, nationally less than 5% of the graduating students go directly into ownership of a practice.
- Smaller practices with potential are easier to sell because the buyer can afford them. T/F False. Small practices may be riskier as they often don’t throw off enough earnings to pay overhead, acquisition debt service and costs, student loan debt and taxes and have anything left for living expenses. Every practice has potential but you need cash to pay bills.
- Student loan debt makes it impossible for buyers to borrow from a lender meaning you may have to carry part of the financing. T/F False. Assuming it is not out of the current norms, industry savvy lenders expect student loan debt and do not require seller carryback.
- What is involved with Due Diligence? Whatever is required by the buyer to be sure they’re getting what they think they’re getting.
While we hope this has been informative, we don’t mean to ignore the current pandemic and the stress it has brought to your practice. I wish I could tell you how this was all going to work out but unfortunately there is not a playbook for this situation. We know that things will eventually get back to some form of normalcy and we will enjoy the opportunity to visit with you about your plans and share our vision of the market. We believe that things may happen quickly and urge you to be prepared.
While business cliques such as this and others like; “At the end of the day” and; “It is what it is” get thrown around to the point of ad nauseum, there is a strong element of truth attached to it with respect to practice transitions. Let’s face it, most docs have very limited if any experience in practice valuation, marketing and sales. Admittedly there is a certain order to the process but I can assure you that every one of the 285+ sales we have had over the last 27 years has been unique. Dealing with roadblocks, maintaining order and fairness is an everyday part of our business. I’m pretty sure you would not sit in the left cockpit seat of a passenger jet without proper training so how can you be expected to know what to do when you have no experience in dental practice transitions?
A few years ago my friend Steve Jordan of the PMAgroup, LLC penned a list of 36 questions (there are potentially hundreds) for Dental Economics that a practice owner might ask themselves or prospective advisors about the sale of their practice. I’ll take 10 and let’s see how you do. There are no trick questions.
- A classified ad in your local dental society publication will reach most buyers. T/F
- What documents and metrics will you need to provide to buyers and their lenders in the form of a Prospectus?
- Why is EBITDA or Excess Earnings important to a practice valuation?
- A revenue multiplier is the best way to value a practice. T/F
- How did you determine that number?
- How is a cap rate calculated, how is it used and what rate is typical?
- Dental schools are a great place to find buyers for your practice. T/F
- Smaller practices with potential are easier to sell because the buyer can afford them. T/F
- Student loan debt makes it impossible for buyers to borrow from a lender meaning you may have to carry part of the financing. T/F
- What is involved with Due Diligence?
I’m happy to score any answers you might be willing to submit but suspect you’re asking for trouble if you don’t get nine out of ten correct as these are common, everyday elements of our business. If you have any doubts, connect with us by phone, text, email or facebook and let’s find a time to meet to see if we can be of service to you, your staff, your patients and your family.
UMKC Class of 1977
As more and more practices established in the 60’s, 70’s and early 80’s come on the market, it seems likely that a good number of them will need to be merged into existing practices in order for the retirees to perpetuate care of their patients and maintain custody of records. With enrollment to local dental schools in our market significantly less than previous levels, a significant number of retirement age doctors will not find buyers to sustain their practices into another generation. Doctors whose revenue is less than $500,000 often find positioning their practices for a merger into another may prove to be the best exit strategy. We have assisted sellers in ten of these in the last five years and have acquired enough data to establish some solid trends contributing to the marketability and successful transitioning of these practices.
Geography will matter: Common sense suggests that the closer the office is to the old location, the more likely it is that patients will visit the new doctor.
Fees and Insurance compatibility: The Buyer needs to review fees and make sure they are relatively close to those in their office. Also, in today’s world, if you do not accept the patient’s insurance, they may go elsewhere.
Letter to patients: The announcement of the Seller’s plans, the introduction of the new doctor and the advisement to the patients as to the custody of their records will go a long way in “laying the sword upon the shoulder” of the new owner.
Retaining staff people: It is no secret that many patients may have more connection with the office manager, assistant or hygienist than they do the doctor and having one or more come to the new office has a powerful effect on patient retention.
Do the math. Even if you score poorly on the previous points, these deals are usually good for all of the parties. While we find that traditional wisdom suggests that 85-90% of patients may be retained by the new owner in a traditional transition, mergers such as these bring a lot of variables and that may not happen. Surprisingly, they can be very successful for the buyer even if a much lower percentage make the switch. While we’re often asked how much a patient record should sell for, the better question might be how much additional revenue the buyer can expect as a result of the transaction. Annual collections of the target practice, a realistic patient count, the production capacity and overhead of the receiver practice along with comparable sales data such as we have accumulated can show just how quickly the payback will occur and what the long-term benefit to the deal will be to a practice.
I’ll let you in on a secret; once someone does this and works through the process, they are anxious to do it again as they realize there is no cheaper or faster way to build up a practice.