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If you’re a dentist, you’ve told your patients hundreds, if not thousands, of times that good hygiene is one of the easiest and most important things they can do to maintain and improve the health of their teeth. But has anyone ever told you that developing a good hygiene practice is also one of the easiest and most important things you can do to maintain and improve the value of your dental practice?
There is a ready market for the sale of dental practices. And when a practice sells, it is usually for an amount that is substantially more than the appraised value of the tangible assets, which is mainly the dental equipment and leasehold improvements. This is to say there is some goodwill included in the sale price. This goodwill may be expressed in terms of an amount per active patient chart, the number of chairs, a percentage of annual production, or a number of other rules of thumb.
We note that the use of rules-of-thumb is commented on by the ADA as follows :
“Although certain rules of thumb can used for a ‘gross’ estimate of a practice’s fair market value, these should never be used solely as the only method to value a practice for the purpose of establishing an asking or purchase price. Rules of thumb are typically simplistic and do not account for unique characteristics for the specific practice or the community. Parker’s Rules of Thumb states: ‘A rule of thumb is a homemade recipe for making a guess. It is an easy-to-remember guide that falls somewhere between a mathematical formula and a shot in the dark.’”
When we determine the fair market value1 of a dental practice, we focus on income generated by the tangible and intangible assets of the practice. This shouldn’t be a surprise, as it’s the same principle used by most chartered business valuators and corporate finance professionals to determine the value of privately held companies, no matter what the industry. Goodwill is determined by subtracting the value of the net tangible assets from fair market value. Rules of thumb, like the ones above, are then applied as ‘smell tests’ to determine the overall reasonableness of the value conclusion.
However, no matter how you count it, goodwill can account for a substantial portion of the price realized on the sale of your practice. The question you should be asking is “How do I make that amount bigger?”
Some of our clients are surprised when they come to understand the impact a good hygiene practice has on the value of a general dentistry practice, but think about it - what part of your practice makes you money while you’re doing something else, or when you’re not even there? Restorative procedures may result in higher daily revenues, but these revenues require your direct involvement. Without you, or an expensive associate in your place, nothing happens. However, you could be in the next room filling a cavity, or on the green of a 150 yard par 3 trying to save triple bogey, and your hygiene practice is making you money. The ability of a dental practice, or any business, to operate profitably without the direct supervision or involvement of the owner enhances value.
Improving the relative size of your hygiene practice is the easiest way to increase the fair market value of your general dentistry practice.
Now think about this...if you have an associate working with you, what part of their employment agreement provides them with monetary incentive to develop your hygiene practice? In fact, does that agreement actually reward your associate for doing hygiene work themselves, thereby preventing hygiene revenue, and the value of your practice, from growing? This may be a significant contributing factor to the fact that practices run by associates tend to have below average hygiene production.
In terms of hygiene revenue, how does your practice stack up? Does the practice you’re looking at buying present an above average opportunity to easily increase in value? How can you properly align the goals of your associate with your own? To find out, contact Cal Carpenter, CA, Professional Services leader at MNP, or myself.
1 As determined by the Canadian Institute of Chartered Business Valuators.
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