Transitions roundtable

Jan. 1, 2011
We ask two experts the same question to give you two different answers on a complex issue

We ask two experts the same question to give you two different answers on a complex issue

Question: Why do practice values vary so much around the country?

By Philip A. Cooper, DMD, MBA

The value of a dental practice depends on many factors. The tangible asset portion of the value includes the equipment, supplies, instruments, and furniture. The intangible (typically referred to as the goodwill) is a function of the financials (gross and most importantly the profit) and what I refer to as the relevant practice factors. These factors are comprised of the things that a buyer typically considers when looking at practice opportunities, such as staffing, numbers of patients, fee structure, insurance participation, etc. The list can be quite lengthy depending on the buyer. Once a buyer decides that he/she is interested, these factors play a role in determining what they will offer. The more positive the factors are, the more a buyer will be willing to pay for a particular practice.

Included in the list of factors is the location. This can mean the specific location (free standing building, office building, area of town) and the general location (city, suburban, rural). Most buyers tend to be interested in certain types of locations and certain geographic areas of the country. For example, a rural practice will have no value to a buyer looking for a city or suburban location and vice versa. The same holds true for a practice in a state a buyer is not interested in.

Practices may have lost some value in economically depressed areas. To a certain extent, that may be more of a function of the practice numbers declining. Overall, however, I do not think that practice values fluctuate significantly from area to area of the country. Sellers cannot change the general location of their offices, but they can keep them up to date and profitable. A good practice in a desirable area is always going to be in demand by prospective buyers.

For more information, please contact Philip A. Cooper, DMD, MBA, of American Practice Consultants in Moorestown, N.J., at (800) 400-8550 or [email protected].

Question: Why do practice values vary so much around the country?

By Tom Snyder, DMD, MBA

Although national publications cite that general practices sell for 60% to 65% of last year’s gross receipts, in reality, that is not always the case. There are several factors that impact your practice’s value:

Area demographics – Area demographics have the most significant impact on a dental practice’s value. If you live on the West Coast you may be able to command a value equal to 100% of last year’s gross receipts. Conversely, if you practice in rural mid-America or certain parts of New England, you may see a value capping at the 50% range of last year’s gross receipts. Most major metropolitan areas can command values of 60% to 70% of last year’s gross receipts. In the end, it’s all about supply and demand of purchasers. Trends show that rural areas and small towns are attracting fewer from our dental graduate pool and hence, we have more sellers than buyers, with the net result being lower prices. Conversely, metropolitan areas attract more graduates, thus increasing the pool of purchasers and practice values.

Patient base – The size of a patient base has a major impact on the success of any practice transition and will certainly impact a practice’s value. Practices with a small patient base usually result in a lower value than practices with a large active patient base.

Practice profitability – Historically, practices with high overhead (greater than 70%) do not command top dollar in practice value. Buying a practice is also about purchasing an income stream, so typically the greater the profit margin, the higher the value.

There are other factors that will impact your practice’s value, but these three key factors usually have the greatest impact.

Tom Snyder, DMD, MBA is the director of transition services for The Snyder Group, a division of Henry Schein. He can be reached at (800) 988-5674 or [email protected].

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