Transitioning a dental practice to a new owner is the most financially advantageous way to be compensated for your practice. Almost all dental practices have tangible and intangible assets that can be sold. Buyers take multiple forms, from a single dentist to a venture capital firm. The price is what a buyer is willing to pay and what a seller is willing to take for the sale.
Dental practice sellers should receive maximum value for their practices. Enhancing the value of a dental practice does not happen quickly. Three years is the minimum amount of time to allow for building value, which can lead to a higher selling price. If you’re able to plan ahead, here are ways to build the value of your practice.
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Practice overhead
On average, a dental practice should provide about 35% of collections to the owner and associates. This includes benefits such as health insurance, retirement plan contributions, and other discretionary expenses. Buyers will pay a higher price for practices that are more profitable. Dentists should consider comparing overhead expenses to dental practice benchmarks to learn if there are overhead items higher than the benchmarks. Resolving spending inefficiencies in these categories can make a practice more profitable and valuable.
New-patient flow
We estimate that a practice loses about 15% of its patient base each year. There are many reasons for patient loss, including relocation, death, change in insurance, not getting reappointed, or unhappiness with the practice. In order for a practice to maintain its active patient base, lost patients need to be replaced each year. For a practice to grow, additional new patients must be added.
A practice with 1,000 active patients will lose about 150 patients a year. This requires about 12 to 13 new patients a month to maintain status quo. At a 5% growth rate per year, new monthly patients should number around 18 to 20 a month.
A new patient is defined as someone seen in the practice during the last 18 months and who is eligible for hygiene. This excludes out-of-town patients in need of emergency care. Your practice management software will not distinguish between an out-of-town patient and a patient eligible for hygiene. It may be necessary to manually track new patients.
The dental team
The most valuable asset in a dental practice after patients is the team. A passionate and cohesive team is critical to the success of a practice because the patient experience is led by the team, and a positive patient experience is a key to retaining patients.
It’s the dentist’s responsibility to build passion for patient care. As the leader, the dentist’s vision of patient care and practice success is achieved when they share this with the team and consistently reinforce this behavior. A practice with an underperforming team member sends the message to other team members that not doing your best is acceptable. All team members functioning at their highest potential leads to a more profitable practice and improves practice value.
Fee increases
Each year, practice overhead goes up. A good example of this is that almost every practice will annually increase employee compensation. Along with other expenses, an annual increase in practice overhead will reduce profitability. If no action is taken, the dentist will need to work more hours to pay for the overhead increases or risk earning less income. These are not good options when trying to maximize practice value.
The easiest way to make up for the overhead going up is to increase fees. A small percentage increase based on the Consumer Price Index can boost collections enough to cover overhead and improve owner earnings. Improving earnings increases a practice’s value.
If fees are substantially below the average fees of the area, consider raising fees every six months to catch up. However, increasing hygiene fees every six months is not recommended as patients would pay more with every visit.
If the practice participates with managed care providers, some providers may raise fees if they’re contracted to reimburse dentists for fees at a certain percentile in the area. For example, if the fees submitted to the insurance company go up, the insurance company may be required to raise their reimbursements to meet the contractual obligation of paying in the 70th percentile of fees for the area.
Practice management software
Reliable data about a practice can help not only with improving practice performance but can be relied on by a buyer when it’s time to sell. Most dentists do not realize the amount of information available in the software that can assist with enhancing practice value.
Practice management software provides data about practice collections. A practice should optimally collect 100% of fees for services. Collection of 97% of net production is considered excellent. It’s important for a practice to have collection procedures and that those procedures are followed. Having a high percentage of net production being collected results in higher collection and improved practice value.
Practice management software provides information on procedures performed in the practice. A review of these on a daily or weekly basis can identify miscoding or unbilled procedures, as well as overlooked revenue. The software also provides data about active patients, new patients, patients in recall, and patient zip codes. All this data is helpful for taking steps to enhance income and build practice value.
Maximizing the value of a dental practice is a key consideration when deciding to transition it. It takes time to grow the value. Implementing these suggestions can lead not only to improved practice value, but also improved profitability for the owners.
Editor's note: This article appeared in the February 2023 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.
