DR. ACE GOERIG
OWNER & CO-FOUNDER DDS, MS, ABE Diplomate
Two fundamental practice values exist for every practice owner: operational value and exit value. Operational value refers to the practice’s value as a profitable enterprise, while exit value represents the value that can be realized upon selling the practice.
If a practice owner holds their practice for 30 years before selling, their total ownership value comprises 30 years of operational value followed by a single instance of exit value. This is like a big cake with a cherry on top.
When doctors approach retirement and contemplate their timelines and options, the value of the cherry increasingly becomes their focus. They seek to maximize exit value, either to secure financial contributions to their retirement accounts or to commemorate the years of dedication and effort invested in their practices.
Expectations for exit value
Let’s contextualize exit value. The average endodontic practice completing 3 to 4 cases per day typically sells for between 60% and 75% of gross revenues. Assuming 3.5 cases per day (5 days per week, 48 weeks per year, at $1250 per case) results in gross revenues of approximately $1 million annually. So, the range of valuation could be anywhere between $625,000 and $750,000.
Considering the average profitability of practices at this level, the practice’s value is likely to be equivalent to approximately 2 years of doctor typical income while practicing. This is merely an illustration, not a definitive rule. Each practice is unique and will have an individual valuation.
So, obsessing about getting an exit value at the high end potentially makes a difference of about $125,000. That difference, however, represents a negligible amount over the course of an entire career. Regardless of the exit value received, it is insignificant compared to the 30+ years of operational value.
Operational value potential
To maximize your total ownership value, the best strategy always focuses on optimizing your operational performance year over year. From an operational perspective, let us revisit the average practice completing approximately 3.5 cases per day:
Financial surveys of endodontists show that the average doctor earns around $330,000 annually (which is less than what an associate would typically be compensated for completing the same procedures). Assuming they keep this level of productivity for 30 years of practice ownership, the 30-year operational value for the owner doctor would effectively be $10 million.
If the same doctor were able to increase their case volume by 1 case per day (from 3.5 to 4.5 on average), their annual revenues would increase by $300,000. Since all fixed costs are covered, most incremental revenue flows directly to the bottom line as increased profit. This incremental profit has a 30-year value of nearly $9 million, adding to the original $10 million. Achieving the same result could be accomplished with 2 more cases per day for 15 years or 3 more cases per day for 10 years.
Summary: focus on the cake, not the cherry
Retirement becomes a significant concern for many doctors, typically starting around 10 years in advance. During this period, they often become overly focused on maximizing exit value for a difference of a few hundred thousand dollars at best.
Instead, they should prioritize maximizing their operational value at the peak of their endodontic expertise and skill. This approach could yield a substantial difference of $5 million to $10 million over the same period.