Does value equal productivity?

People claim that practice value and practice production go hand in hand. If the gross production of the practice decreases, they say, the value of the practice decreases. While it may appear that practice value always is associated directly with productivity, it may not always be the correct assumption.

Nov 1st, 1997

Tom Smeed

People claim that practice value and practice production go hand in hand. If the gross production of the practice decreases, they say, the value of the practice decreases. While it may appear that practice value always is associated directly with productivity, it may not always be the correct assumption.

Many factors other than production need to be considered in arriving at practice

value. These factors include the profit of the practice, the dollar potential of dentistry that still needs to be done, the location of the practice, the number of active patients, the staff, the mix of services, etc. For example, let`s assume that practice production is the factor that you are examining. The "whys" of the increase or decrease in production need to be evaluated before you can better understand how it will affect the value. To illustrate this, let`s look at some different situations. You determine how you feel the practice value will be affected.

In the first scenario, a buyer looks at information on the practice and notes that, during the past two years, the practice showed considerable increases in gross production. This could mean a number of things ... some good, some not so good.

It could mean that the selling doctor became far more aggressive in his diagnosis of the patients` needs. Looking at the patient files, the buyer notes that a lot of the increase in production is in the area of crown-and-bridge work. During the past two years, the doctor also has taken a number of courses on cosmetic dentistry and occlusion. This might account for the more aggressive diagnosis and treatment-planning.

What does this mean to a potential buyer and what effect will this information have on the buyer`s opinion about the practice`s worth? If a review of patient files reveals that much of the dental work that needs to be done has been completed, the buyer may deduce that potential work in the patient files is scarce. Do you think that will increase or decrease the practice value in the eyes of a buying dentist?

- It could mean that the doctor is generating more new patients. If this increase in new patients is a result of a more aggressive marketing approach, the assumption might be that this will add greatly to the value of the practice. This could definitely be the case.

A closer examination may indicate that most of the new patients came to the practice because the doctor offered a cleaning and examination for $1. Many of the patients came back to have some needed dentistry completed, but they did not reschedule their next recall visit. How do you think this would affect practice`s value in the mind of a potential buyer?

In addition, the increase could be due to a more aggressive internal marketing approach. Many new homes also are being built in the area. How do you think the buyer would view value now?

If the increase in production is due to the doctor signing up for managed-care programs, how do you think a buyer would determine practice value?

In another situation, the production of the selling doctor decreased by 5 percent during the past two years. A review of the doctor`s records indicates he spent more time out of the office, yet the number of recall patients he saw stayed the same each month. The records also showed that the work that needed to be done was a large amount.

The selling doctor expressed the opinion that he "just wasn`t working as hard." He also stated that many of the procedures he used to do was now referred to specialists. What might a buyer for the practice determine from this? Would this information affect the value of the practice and to what extent?

The message of this article is this: Don`t make the assumption that practice value increases if gross production goes up, and vice versa. You could be making the wrong assumption. Only by gathering all the facts, and correctly interpreting those facts, can you be assured of the fairest value for the sale or purchase of a dental practice.

Tom Smeed is founder and president of Healthcare Practice Management, Inc., a dental broker, appraiser and dental practice-management firm. He is one of the founding members of American Dental Sales, the largest group of dental brokers, appraisers and consultants in the United States. For details, contact the ADS member in your area (See the ADS classified ads).

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