Transitions Roundtable We ask two experts the same question on a complex issue.
I've been working in a dental practice that I plan to purchase. I'm bringing in my own patients and I add value, such as creating and managing the office Facebook page. How will this affect the selling price? I don't want to pay the owner dentist for the equity that I've added.
I've been working in a practice that I plan to purchase. I'm bringing in my own patients and I add value, such as creating and managing the office Facebook page. How will this affect the selling price? I don't want to pay the owner dentist for the equity that I've added.
TIMOTHY G. GIROUX, DDS
A close friend of mine bought into a practice after several years of being an associate there. She was a rock star and practically doubled the revenue of the practice. After associating for three years, she was offered an opportunity to purchase half the practice. The price? Full market retail value even though she was responsible for increasing the revenues. Being a practicing dentist at the time, I was shocked and thought she was being taken advantage of. She bought into the practice, continued to grow the practice, and never looked back. It worked out fabulously for her.
This was the best choice for her as she knew every detail of the practice. She knew it would continue to grow, and she basically received a huge pay raise for doing the same amount of work. Her other option was to pay full retail price for a practice she wasn't familiar with. That would have been very risky. Since starting a practice from scratch now costs about $400K to build out, that option did not make financial sense for her, and it would have been very risky, even if she assumed that some of the patients might follow her.
The answer to this question is that everything should be discussed and contractually addressed prior to associating in a practice. If there is any chance of a possible equity purchase in the practice, the valuation should be discussed from the beginning.
I've often seen adjustments to prices in situations like the one described here, where the value of the practice is based on "splitting the difference" of the additional revenues that the buying associate has generated. Negotiations will also vary from state to state depending on whether covenants not to compete are enforceable for associates. There is no rule of thumb in this regard, and as the saying goes, "You don't get what you deserve, you get what you negotiate."
Tom Snyder, DMD, MBA
The major issue here is that a baseline practice valuation was not prepared at the beginning of your employment. We typically recommend preparing a baseline practice valuation within the first year of employment. For example, if you joined the practice midyear, your baseline practice valuation would be completed at the end of the calendar year from your initial employment date. If you brought patients to the practice from day one, they should be properly coded as your patients. Any revenue generated from those patients when the baseline valuation is prepared should be excluded in the calculations.
As far as Facebook is concerned, patients coming from that source can be excluded on any valuation calculations as long as they are properly identified when they join the practice.
Many selling doctors actually do benefit financially from a baseline practice valuation. This is because associates have no constraints on working hard, recruiting new patients, or doing anything to increase their personal production because they will not pay for that increase. It is a win for both parties! An associate can earn more income and chances are the practice owner will too. From our experience, we've found that a properly designed associate arrangement can generate a net profit for an owner of between 30% to 35%. For example, if the practice were to increase revenue $500,000 from an associate's efforts over the term as an associate, the seller can earn $150,000 to $175,000 in increased profits over that time.
When using a baseline valuation, there are two points to consider when it's time to update the value for the transition. First, any purchases of equipment or technology during the associate phase should be added to the value of the tangible assets. Second, the goodwill portion of baseline practice value should also be adjusted to account for inflation. Hopefully you can convince the owner that some discount is warranted from your successful efforts since you joined the practice. Even better, the ideal scenario is for the seller to go back in time and prepare a baseline valuation. That is the fairest alternative for both parties.
TOM SNYDER, DMD, MBA, is the director of transition services for Henry Schein Professional Practice Transitions. He can be reached at (800) 988-5674 or TomSnyder@henryschein.com.
TIMOTHY G. GIROUX, DDS, graduated from Creighton University in 1983. He established a very successful dental practice in Scottsdale, Arizona, where he and his wife, Mona Chang, DDS, practiced. Dr. Giroux, a member of ADS, is now the owner/broker of Western Practice Sales, a dental practice brokerage firm in the Western US. Contact Dr. Giroux at (800) 641-4179, (888) 419-5590, ext. 530, or email@example.com.