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How to appraise a practice

Nov. 1, 2003
Understanding how to appraise a dental practice is more than looking at the accounting numbers. Using accounting methodology for appraising practices only tells part of the story.

Tom Smeed

Understanding how to appraise a dental practice is more than looking at the accounting numbers. Using accounting methodology for appraising practices only tells part of the story. For a buyer to understand what value the practice has, an appraisal encompassing accounting methodology and an understanding of practice management numbers is essential.

To understand these numbers, you need to have a "benchmark." The benchmark numbers I will share with you are from statistics gathered from some of my consulting clients. These numbers represent doctors in the 75 percent quartile.The benchmark numbers tell two stories. First, they give us a basis from which to measure — i.e., how do the numbers of the appraised practice compare with the benchmark practice? If the benchmark practice and the appraised practice have the same gross production numbers — but the appraised practice only has half the number of active patients — it might be safe to assume that the doctor in the appraised practice is doing a lot of comprehensive dentistry and the buyer of that practice might find most of the patients have the majority of needed dentistry done.

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If you calculate the production per active patient per year and find that number to be over $630.00, you can be assured that your assumption is correct. If the number of active patients in the appraised practice is the same as the benchmark practice — but the number of new patients is 10 per month — it could be inferred that the appraised practice is not generating enough new patients to replace the patients normally lost in an average dental practice. (My statistics shows that an average dental practice loses 12 percent to 18 percent of patients each year due to normal attrition for that area.) If the number of monthly hygiene visits in the appraised practice is significantly lower than the number of monthly hygiene visits in the benchmark practice, it could indicate a recall program that is underperforming, or a practice with a lot of new patients who are not being retained. It might also infer that this is more of an emergency type of practice.

The second story the benchmark numbers tell us is what a healthy relationship should be between the numbers. How many active patients should we have to produce a certain dollar amount? How many doctor visits should we have in relation to the number of hygiene visits? How much profit should we realize based on our receipts? How many hours should we have to work to reach our production goals? While there are always exceptions, I have found that the benchmark numbers give a very accurate picture of healthy number relationships.

If the information we receive on the appraisal does not give us the practice management numbers, then it is the responsibility of the person interpreting the appraisal to obtain these numbers. If the appraiser did not obtain the practice-management benchmark numbers to help arrive at a practice value or price, it might be an indication that the appraiser was not as thorough as he or she should have been to arrive at a "fair market value."

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 and past president of American Dental Sales. Contact him at (913) 642-1988.

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