A funny thing about your practice’s intangible value

Jan. 1, 2011
Intangibles seem elusive and impossible to see, but just as we can see the effects of the wind (while unable to see the wind itself), it is easy to see their impact.

John K. McGill, MBA, CPA, JD, and Roger K. Hill, ASA

For more on this topic, go to www.dentaleconomics.com and search using the following key words: dental practice value, financial planning, John K. McGill, MBA, CPA, JD, Roger K. Hill, ASA.

Intangibles seem elusive and impossible to see, but just as we can see the effects of the wind (while unable to see the wind itself), it is easy to see their impact. Ultimately, intangibles are powerful, lasting, and what matter most. Always.

Let’s think about how each of us makes decisions, especially the important ones. While it’s theoretically possible to make decisions from a purely objective (and in some instances qualitative) standpoint, it usually doesn’t happen that way.

In most cases, we make decisions, especially the big ones, from an emotional place. We know that’s true simply by witnessing what parents do for their children that often defies all logic. And, as counterintuitive as it may seem, this is as it should be.

Doctors should note this important fact: the best and brightest decisions are always made after looking at objective analysis that helps contrast results and understand the fundamentals. Decisions of magnitude need to be made only after thoroughly reviewing the objective analysis.

Back to the importance of intangibles. In most cases, the intangible value of a dental practice far outweighs the tangible value. That’s because it’s almost always more efficient to acquire an income stream rather than creating one.

Beginning a practice and building a patient base, which then generates revenue and ultimately profit, is a far less efficient process than simply acquiring the income of an existing practice. This could be accomplished through the purchase of a fractional interest or the entire practice, depending on the circumstances.

This makes abundant good sense if you think about it for a moment. What gives rise to intangible value is the ownership profit that remains after subtracting normal overhead expenses (i.e., absent any benefit to the doctor) and reasonable compensation to be paid to a doctor for providing the clinical work.

Think of yourself (if you are the practice owner) as your own associate. Clearly, you are not going to pay yourself all of the profit; instead, you will pay what is necessary to your associate (yourself) to provide the clinical services.

It is the remaining ownership profit that impacts intangible value. In short, since this incremental profit is only available to the owner, this is the basis for the value of a dental practice’s intangibles.

Contrast this with your practice’s tangible component. Its value is limited to items that enable you to produce revenue and, therefore, profit. In and of themselves, these items are intrinsically far less valuable. Oddly, even though intangibles cannot be seen, their effect can be measured and, therefore, valued. More to the point, intangibles always outlast tangibles.

You can see this in your own life. For example, intangibles such as love and memories always outlast tough times. In a similar fashion, the intangibles of your practice always outlast the items that will ultimately wear out. Intangibles have a life of their own, although this life must be constantly guarded and nurtured.

So, where does this leave us with respect to intangibles –the places from which decisions are made – and your practice?

If you are considering any type of transition activity, it is highly likely that you will ultimately make this decision from an emotional place. However, this decision should never be made without sufficient analysis, economic modeling, review of the results, and consideration of the outcomes.

Lack of attention to this comprehensive preparation for making significant decisions will almost invariably lead to heartache. In short, not knowing does not save money. The cost of not knowing is usually much greater than the amount you invest to clarify your vision.

Perhaps one final analogy will be helpful: we need to define our path and then look for the right person and circumstances that fit that vision, not the other way around. Otherwise, we risk failure financially and in personal terms.

By any measure, decisions of magnitude will affect the rest of your life, involving your largest income-producing asset – your practice. Make your decisions from the emotional place, but only after you are prepared, so the intangibles will make your dream a reality. That is what intangibles do.

John McGill provides tax and business planning exclusively for the dental profession and publishes The McGill Advisory newsletter through John K. McGill & Company, Inc., a member of The McGill & Hill Group, LLC. Roger Hill provides transition planning for practice sales, partnerships (buy-in/buy-out), practice mergers, associateships/compensation analysis, and financial forecasting (pro forma) through Roger K. Hill & Company, also a member of The McGill & Hill Group, LLC. Visit www.mcgillhillgroup.com for more information.

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