You Don’t Know What You Don’t Know – Part Two

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.

  1. 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.
  2. 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”.
  3. Why is EBITDA or Excess Earnings important to a practice valuation? It is an accurate measure of cash flow and profitability.
  4. A revenue multiplier is the best way to value a practice. T/F False. It is not an appraisal method.
  5. How did you determine that number? Someone either makes it up or refers to anecdotal evidence.
  6. 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.
  7. 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. 
  8. 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.
  9. 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.
  10. 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.

Steve Wolff