CYNTHIA STAMATION
CHIEF EXECUTIVE OFFICER
At some point, every practice owner faces the question of how much their practice is worth? A quick search on Google for dental practice valuation will produce links to articles and websites that talk about methods of valuation such as discounted cash flow, capitalization of earnings, revenue multiples, earnings multiples, summation of assets, market comparisons, etc.
For a lay person in valuation such as the typical practice owner, not much is gained in reviewing the methods and formulas on those websites. Formulas don’t actually determine the value of your practice; a buyer does. A practice is only worth what someone will pay for it, and there are a lot of factors at play. This includes everything from the financial qualifications of the buyer to your reasons for selling in the first place.
A formal practice valuation, even one performed by a valuation expert, only results in a starting point for negotiating a price and a deal. A great price for the seller always means having a great story that the buyer wants. You see this in real estate all the time: two very comparable listings in the same neighborhood, and one gets multiple offers and sells quickly while the other sits on the market for months. Someone (realtor? homeowner?) is telling a better story.
Here are 3 things you can do to tell a better story about the value of your practice:
Boost the financial story
Every practice purchaser is looking at your practice as a business and means to generate profit, and so every valuation method places high importance on the financial health of the practice. Often the revenues or earnings of the past 3 years are considered, usually in a weighted average where the most recent year counts the most.
Typical Endo Mastery-coached practices often get on track to increase revenues by 50% or more within 1 year, which can result in significantly higher profitability and reduced practice debt. That can have a major impact on valuation results. More importantly, it gives you a much stronger story about the potential future revenues of the practice for the negotiation of a deal. Everyone loves a strong growth trend.
Supercharge the marketing story
Most of the value in your practice is in the form of goodwill, which means your relationships with your referrers. When a purchaser buys your practice, they count on (a large majority of) those referral relationships to continue. Typical purchase agreements require you to stay on as an associate for some time to protect and facilitate the transfer of goodwill in those relationships. For a doctor purchase, you might stay for 6 months to a year. For a corporate purchase, you may need to stay up to 5 years to meet various additional requirements (vesting, etc.) of their structured deals in addition to goodwill value.
In either case, strong referral relationships tell a great story and remove the uncertainty from goodwill assessments. As a seller, you want to ensure you have an effective and robust marketing system in place, with careful management of each referrer by your marketing coordinator. This is also part of the process to stimulate economic growth for your financial story.
A powerful marketing system is also the antidote to the kind of buyer who is looking for a practice that doesn’t market effectively, and then uses that fact to highlight uncertainty and negotiate a reduction in the goodwill value. Their logic is that an underperforming and undervalued practice can quickly be stimulated to grow by establishing a better marketing strategy. It’s not a bad strategy because most endodontic practices underperform when it comes to marketing. Don’t be one of them when you sell your practice.
Amplify the expansion story
This final point particularly applies to corporate purchases, which are so commonplace these days. The corporate model allows you to stay on as an associate in your practice and continue to earn an income. But they also value that your practice has the potential for easy expansion with an associate.
Unless you plan to significantly reduce your days (and cases) in the practice, your practice needs to be at a certain size in terms of referral base and economics to support the addition of an associate. At Endo Mastery, we think that practices are ideally ready for expansion when revenues hit around $1.4 to $1.5 million (depending on your fee levels). The closer you get your practice to that number, the more expansion-ready you are and the more valuable your practice will be in a corporate portfolio focused on future growth.
Good business sense
The pattern that is all too common is when doctors reach a comfort zone in their practices, and then slowly allow the practice to coast downhill for years until they are ready to exit the profession. Sometimes fear of that potential decline to a lower future value is what prompts doctors to sell their practices prematurely.
Ironically, doctors who take the steps to optimize and improve practice value in advance of an equity event are frequently delighted that their practice is better than ever—often choosing to remain as an owner in their renewed practice.
Regardless of when or why you are considering a practice sale, it’s good business sense to start prepping your practice to achieve peak performance before you sell. Even just one year of focused improvement through teamwork, coaching and value-based goals completely changes your story and the final deal you end up with.