MARIA G. Melone, CPA, CVA
Question:
What is a statistic some sellers believe to be important but actually has little significance when determining practice value?
Many dentists may be surprised to hear that I have never considered the number of active patients in a practice to be an important factor in determining its value. During my years with one of the largest DSOs in the country, I did not focus on patient load. Instead I focused on understanding the historical revenue stream and its consistency, the mix of services, the mix of payers, new patient count, the ratio of dentistry to hygiene, and the condition of the practice's facility.
Of course, there are many other factors that contribute to the valuation of a dental practice, but these are the factors I felt were most indicative of value. I approached acquisition and valuation from a unique perspective as the result of my decade of experience as a buyer of dental practices. Any misstep I made in this role could have a direct impact on the company's financial performance, and the proper analysis and valuation was a critical element of my role.
I never placed emphasis on the active patient statistic given that there is no industry standard for its definition. Is it someone that has been in the practice in the last 12 months, 18 months, 24 months? Is it someone that has been in the practice only once, perhaps for an emergency visit, and then never scheduled continuing care? Or is it a patient that has regularly recurring appointments? Almost every practice management system reports an active patient statistic, but every system defines that differently and in some cases may only consider a patient inactive if a team member has transferred the person to inactive status in the software.
If your goal is to understand the patient base that you are potentially acquiring, at a minimum I recommend looking at the total number of prophies. If you have full access to the practice's data, it is ideal to look at the total number of patients seen in the hygiene department. Not only will this provide you with insight into the number of patients regularly seeking care, it will also help you understand how full the hygiene schedule is and if there is an opportunity to fill those schedules and drive additional operative care to the doctor.
Tom Snyder, DMD, MBA
The number of doctor days worked annually is a statistic that is often misunderstood by sellers. Specifically, in the latter years of practice, many sellers reduce their clinical schedule so that clinical production and revenue are affected and often decline. Many of these doctors feel that a purchaser can restore the practice's performance to its former levels by increasing the clinical schedule.
Oftentimes, we find that sellers feel strongly that the practice's value should be higher than what many valuators determine. For example, if the practice was averaging $800,000 annually three years ago, and the seller reduced the clinical schedule that resulted in revenue of $600,000 for the past two years, the seller usually feels that the value should be based on the higher revenue, not the most recent history. There is no guarantee that any purchaser can restore that "lost revenue" from the seller's reduced schedule.
This is especially true in competitive marketplaces where patients who were unable to see their dentist due to a reduction in appointment times became frustrated and searched for another dentist. Therefore, we recommend that if potential sellers plan to transition in the next few years, they should not reduce their clinical schedule if they want to receive maximum value. The majority of practice valuations that are prepared by transition consultants and appraisers are based on the most recent years' financial performance, not on potential opportunities.
When faced with situations where a seller demands a higher value due to the potential of that lost revenue being reversed by the purchaser, we suggest an "earn-out." This plan allows for additional payments to be made to the seller if in the first and second year of new ownership the practice increases its revenue to what the practice was generating prior to the seller reducing the schedule and revenue. The payment can be a fixed payment based on the practice reaching specific revenue goals. But if the purchaser implements a marketing campaign, this strategy may not work as most buyers will feel that the marketing was responsible for the increased revenue, not from patients who returned to the practice.
Maria G. Melone, CPA, CVA, began her accounting career at KPMG. She then spent 10 years working for one of the largest dental support organizations, handling all aspects of the buying side of dental transactions. She has helped facilitate hundreds of transactions and has valued even more. She is a founder of MORR Dental Solutions LLC, and dentaldealmate.com. She can be reached at [email protected].
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 [email protected].
