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 25 years and soon to be over closed 270 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 over pay 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 $4242.00 (10-year loan at 5% interest) for the asking price as opposed to $3818.00 to service your offer. In truth, you are not walking away from a $40,000 difference in price but rather a $424.00 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, DDS