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The “KISS” Practice Valuation

"Keep it simple, stupid,” or the more egalitarian, “Keep it super simple” is a piece of advice that is useful in quickly valuing dental practices. I recently received a 70-page practice valuation for a practice valued at less than $200,000. The mass of data was mostly hubris. This article presents a four-step process that allows you to rapidly do a thumbnail sketch and decide what a practice is worth to you.

(1)Look at the balance sheet. Purchase the assets listed on the balance sheet (goodwill, equipment, instruments, supplies, accounts receivable, and leasehold improvements). Let the seller look after the liabilities.
(2) Look at the income statement. Delete the income and expenses that you would not incur. Pay yourself as a dentist what you would pay an associate. Now you have the normalized profit that will be left for the new owner. Your accountant can do this in 10 minutes.
(3) Decide on a fair multiple of the normalized profit that you would pay for the practice (buy at three times, sell at five times). Pay more if there is a vendor take back (VTB), ie, money that you pay to the vendor over the next 5 years.
(4) Arrange financing to optimize your return on invested capital (ROIC) (Table 1). Normalized profit can support $300,000 bank and VTB debt and provide an excellent return on your investment.

There are two key points. The first is that the VTB assures you that the seller and the purchaser remain on the same side of the economic fence for the next 5 years. The seller will be rooting for your success. And if they get 6% on the VTB, it’s better than putting money in the bank.

The second point is that the ROIC is akin to the miracle of compound interest. Table 2 shows the importance of ROIC using an investment of $1 as an example; what you might get at the bank (4%), your average return using the stock market (10%), and the amazing difference over time you can achieve by improving your ROIC (30%) (Table 2). Imagine what would happen if you invested $2!

Once you are close on the price and the VTB then, and only then, is it time to spend your money on your due diligence.

This four-step formula allows for a quick comparison of two different practices, or even between investing in a dental practice or a Dairy Queen.

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