Location! Location! Location!

Dental practice brokers and appraisers frequently are asked to: "give me a ball-park figure as to what my practice is worth. I read that practice value should be one and one-half times the average profit of the practice for the past year or 70 percent of the average of the past three years` gross production." While these simplistic formulas work some of the time, they don`t work the majority of the time.

Tom Smeed

Dental practice brokers and appraisers frequently are asked to: "give me a ball-park figure as to what my practice is worth. I read that practice value should be one and one-half times the average profit of the practice for the past year or 70 percent of the average of the past three years` gross production." While these simplistic formulas work some of the time, they don`t work the majority of the time.

The ultimate test for practice value is what some dentist is willing to pay to purchase the practice. You can value your practice any way you want, but if you can`t find a buyer at that price, your value is incorrect. "Supply" and "demand" is very much a part of arriving at practice value. Supply and demand of sellers and buyers can vary with the location of the office. In some rural areas, there are dental practices for sale but very few buyers who would be willing to buy the practice in that particular location. Sad to say, but I am aware of situations where dentists in some areas just walked away from their practice because they were not able to find a buyer at any price.

In major metropolitan areas, a given practice in one part of the city might sell for more money than if that same practice were in a less desirable part of the city. Many buyers have strong feelings about where they do or do not want to practice. It only makes sense that if you have a dental practice in a very desirable location and there are a lot of buying doctors interested in that location, you will probably be able to sell your practice faster and for more money. In this respect, there is great similarity in the sale of a house. The location of a house is very important in the price it is ultimately sold for.

Every person has an idea of what a desirable location is. For some dentists, the desirable location might be in a small, rural community where there is hunting and fishing. For some dentists, that desirable location might be their home town. For some, it might be a location close to an outstanding school system.

If we were to identify 10 doctors who were interested in purchasing a dental practice, we might find that six would want to locate in a town and section of that town where good schools, shopping, access to major sports and cultural events, airports, etc., were available; three who would want to be in a smaller community near a major city; and maybe only one dentist who would want to be in a small town in a rural area more than 100 miles from a major city.

If the above is true, then you can see the odds are far greater that you will be able to sell your practice if it were in a desirable section of a metropolitan area.

Many doctors move once or twice during their dental career. An important consideration in the move should be location. Locating on a major thoroughfare rather than on a side street could mean faster growth for your practice and greater appeal to a potential buyer. In like manner, locating in a professional building might be better than locating in an office building. Locating in a strip-mall setting might be better than locating in a bungalow office. You need to consider which location is going to be best for you, but keep in mind how that location might affect practice growth and the value of your practice.

A doctor I am aware of, in a community of 100,000 population, moved his office to what he considered to be a more desirable area. The new office was not that far from the old office and he was able to keep most of his patients. What did change is his monthly new-patient flow, which increased from 20 new patients per month to over 50 new patients per month. Outside of office location and the physical facility, everything else about his practice stayed pretty much the same. His new location is allowing him to attract more new patients, which is allowing him to experience greater practice growth, which in turn is creating greater practice value. His new location is in a higher-population growth area of the community, his office has better visibility, his building shows nicer, he is near new banks and other new business, new schools and a host of other positive factors that have made this move the profitable thing to do.

Another factor that needs to be considered when talking about how location can affect practice value is time. If you have a lot of time to find that buyer who is willing to pay you what you want for your practice, you stand a better chance of getting a good price for your practice. If, on the other hand, you have little time to sell your practice, you may find that you have to sell your practice for less money. This is painfully true if the owner-doctor dies or becomes disabled.

The next time you see a simplistic formula on practice value, ask yourself this question. How will the value of my practice, arrived at by this simplistic formula, be affected by my office location?

The author 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 an ADS member in your area. See the ADS classified ads in the back of this issue for names and addresses of ADS members in your area.

More in Overhead and Profitability