Proper timing of pre-retirement office upgrades

Preston Lovelace, JD, MS

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When I discuss transition planning with clients, they often ask what can be done to ensure their practices sell quickly. My first answer, which they never like, is to reduce the asking price. Alternatively, I suggest they give their office a facelift, similar to the way a realtor “stages” a home. It can be as easy as updating the office décor, painting a few rooms, or giving the office a thorough cleaning.

These improvements can be made for little money and are generally a good idea. Replacing equipment, though, can often be as detrimental to an owner’s net profit as an outright price reduction. But if timed correctly in a dentist’s career, modernizing equipment can be a good way to increase practice appeal without impacting the bottom line too greatly.

A practice seller will probably not get a dollar-for-dollar payback for money spent on recent expenditures for technology and equipment. Remember, the majority of practice value is in the patient base. Consequently, practices with old equipment are worth only slightly less than practices with new equipment. If a practice is worth $400,000 currently, investing another $150,000 in equipment at the last minute will not make the practice worth $550,000. In fact, the “new and improved” practice may not even sell for $425,000. Even if these expenditures don’t change practice value, there are good reasons to make the investment.

Recently purchased equipment will be more attractive to prospective buyers and give the office more “curb appeal.” One of the most common complaints I hear from young professionals shopping for a practice is that offices are full of outdated equipment. Those shopping fail to realize that replacing equipment is much easier than recruiting patients.

Few current dental students have ever developed radiographic film, and they have had Internet access for over half their lives. Consequently, their expectations are that a dental practice has to have digital radiography and computers to be competitive. Practices with these features have a higher perceived value and sell faster to today’s technology obsessed professionals.

How do you update office and clinical equipment without diminishing net profit from a sale? The key is to plan ahead. Some types of new equipment, such as digital radiography, will increase office efficiency and reduce supply costs. These reduced operational costs, spread over a number of years, can offset the initial equipment costs and leave a practitioner with a more appealing office. However, before purchasing anything, a cost/benefit analysis must be performed to determine if this approach is feasible.

Not all equipment expenditures will generate reduced operating costs. New dental chairs, for example, will greatly increase a practice’s appeal.But unless they are for newly added operatories, they will not increase office efficiency.

Here is a hypothetical example: a seller plans to retire in three years and wants to spend $65,000 on digital radiography (panoramic X-ray, digital bitewings and periapical sensors, or computers). Does this make financial sense?

First, how many active patients are there? A small practice will take fewer radiographs than a large one and will save less on materials and supplies after investing in digital radiographs. Once we have an idea of practice volume, number of years left to sale, and equipment cost, we can calculate the projected cost saving offsets.

1. Taxes paid on owner compensation of $65,000 (instead of purchasing equipment) are approximately $18,200 (28% bracket).
2. Labor savings depend on staff pay rate and radiograph volume. Assume 30 panorex, 350 bitewings, and 60 periapicals per month. Labor at $10 an hour to develop conventional radiographs in this practice would be roughly $6,900 per year. For three years, this is $20,700.
3. Additionally, the practice would eliminate the cost of film and developer supplies, roughly $5,100 per year, or $15,300 over the three years of our hypothetical example.

Result: At the end of three years, the net cost to the dentist is $10,800.

In conclusion, office improvements and technology expenditures will make an office more appealing to prospective buyers, but these investments must have a sound financial basis other than direct reimbursement from the buyer. With enough patient volume and lead time before a practice transition, upgrading to a modern digital office can minimize both the cost of these expenditures and the amount of time a practice spends on the market.

Preston Lovelace is the vice president of ADS Lovelace and Associates in Baton Rouge, La. He specializes in practice transitions, appraisals, practice management, and associate placement in Louisiana and Mississippi. He is a member of the Louisiana State Bar and U.S. Patent Bar. Reach him at (225) 927-8015 or [email protected].