Transitions Roundtable: Which practice numbers should I focus on improving for potential buyers?
QUESTION:
I’d like to sell my practice in the next five years. I know the potential buyers and brokers will look at my P&Ls for the past few years, but what other practice data do they look at? Which practice numbers should I focus on improving?
Allen M. Schiff, CFE, CPA
As a dental CPA, I am often asked this question. It is certainly a fair question to ask from the seller’s point of view. Often, the question is: Is it too late? What I mean by that is, the seller is well within a year or two of selling his or her practice, and it is often too late to make any corrections prior to the sale. So, five years is very appropriate if you are within that window of time.
Naturally you would like to maintain the bottom line of the practice. This is important because the bottom line translates to cash flow, which then translates to practice value. In other words, if you have a strong cash flow within your practice, this will translate into an above-average value for your practice.
Beyond the bottom line, some factors come to mind that you should pay attention to as well:
- Revenue: top-line revenue
- Marketing: new patients acquired per month
- Team: staff turnover
- Percentage: mix of general dentistry to hygiene
- Facility: remaining state-of-the-art
Revenue: Top-line revenue
It is so important to maintain the top-line revenue during this five-year period. Many will ask why. Quite frankly, you want to make it as easy as possible for the buyer to obtain financing, while maintaining the maximum value for your practice. Take a second and put yourself in the banker’s shoes. A practice with consistent top-line revenue will give the banker the necessary confidence to grant a loan to the buyer. Now, let’s look at the other side. A practice with a consistent drop in top-line revenue year after year will create questions in the banker’s mind as to what’s really going on with the practice.
Marketing: New patients acquired per month
To be a successful dental practice, you can never, never stop marketing. It is important to the success of the practice that there be a constant stream of new patients on the schedule. This is where marketing comes in. As a dental CPA, my clients often ask me what their goal should be for new patients each month. Obviously, every practice varies. For starters, if you are a fee-for-service practice, I’d suggest a goal of 12–18 quality patients per month. For an insurance-based practice, I would suggest 25–30 new patients per month.
Team: Staff turnover
When the buyer performs due diligence on your practice, one of the questions they’ll ask will be, May I please obtain an employee profile of your practice? The employee profile will include items such as who your team members are, their responsibilities, their rate of pay, their fringe benefits, and finally, how long they have been with your practice. When it’s time to sell, can you imagine being able to respond to these questions positively: Most of my employees have been with me over the last 10–15 years instead of Most of my employees have been with me for a year or two?
Percentage: Mix of general dentistry to hygiene
One of the most important key performance indicators (KPIs) in your practice is the percentage of general dentistry to hygiene to the total. Pre–COVID-19, we used a ratio of 75% general dentistry to 25% hygiene. Today, it’s hard to strive for these percentages because many dentists have implemented various precautions that have diminished the number of hygiene patients they see daily. As things return to normal, start to benchmark the percentages listed above, for they will be key in setting up your practice for sale as well as the related profitability that comes with this KPI.
Facility: Remaining state-of-the-art
It is important during this five-year period leading up to the sale of your practice that you consider remaining state-of-the-art. Make sure all your equipment is operable, and, if necessary, upgrade items such as intraoral cameras, replace your digital panoramic with a CBCT, and implement CAD/CAM dentistry in your practice. These items will become the standard of care in the future. If you have these technologies in hand, it will help expedite the sale of your practice as well as preserve its value.
I’ve shared these five KPIs because they are key stats when a dental CPA values your practice. If you can maintain all five, you’ll be happy with the results of the valuation as well as the time it takes to sell your practice. Good luck with the process!
Suzanne Ebert, DMD, ICD
First off, give yourself a big pat on the back for thinking about this early! Too many doctors wait until they have an interested buyer before starting to put their data together. Then they appear disorganized, which can unwittingly sabotage the sale.
You are absolutely correct that you need to organize three to five years’ financials including P&Ls, tax returns, and financial statements. These items document the statistical health of the practice, giving the buyer a great starting point and the necessary documentation to obtain financing.
However, smart buyers look beyond financial documents when considering a purchase. They want to know that they can be successful in the practice. And you want the buyer to succeed so that your patients and staff are taken care of long after you’ve sailed into the sunset.
Try to envision your practice as an outsider. Ask yourself: Are things organized? Does the practice run smoothly? Which changes might improve operations? Your team may have great insights and suggestions too.
Spend your lead time concentrating on the following areas.
Document your schedule, procedure mix, and results
Take pictures of a “typical” week’s schedule so that a buyer can determine if their skills align with the practice’s treatment mix. Also, plan to chronicle a few complex cases (with pre- and post-op radiographs) that showcase the practice’s commitment to high-quality work.
Update your fee schedule
A couple of years before selling, update your fees to ensure that you’re in line with the local market. Then make it a point to review your fees annually to stay competitive. Buyers don’t want to immediately raise fees upon purchase, as doing so can turn off long-term patients.
Engage your staff
Loyal staff members can be your practice’s biggest asset, so tell them you’re beginning to plan your exit and ask for their support. They can write short testimonials about how great the practice and patients are. They can also speak directly with potential buyers to assess “fit” and ensure that they can build a good working relationship.
Refresh (or create) your website
Your practice’s online presence is the first thing a buyer will look at. Make sure your website has current photos and updated information. If you don’t have a website, now is the time to hire someone to build one.
Update practice policies
Buyers want reassurance that the practice will run smoothly even after the seller steps away. Create or update your policies to demonstrate that the office is self-sustaining. Be sure to clean up your accounts receivable too. Combined with solid collections policies, this shows buyers that they will get paid promptly.
Many of these changes take time, so it’s smart to start as soon as you begin considering a sale. Even if you’re not eyeing a sale, these guidelines can boost your practice’s appeal and success. After all, you never know when something might happen to force a sale.
Author’s note: The ADA’s Survey of Dental Fees is free to members at this link: https://success.ada.org/en/practice-management/finances/survey-of-dental-fees.
Editor's note: This article appeared in the September 2021 print edition of Dental Economics.
