I have been in practice for 36 years, for 32 of those years as a private practitioner. I have purchased and sold three practices in the last 5 years, two of which were great financial successes, and one a financial bath. You live and learn. This article is aimed at potential buyers of dental practices and looks at price from the vantage of the bottom line. How much profit is there in the purchase? Does it make financial sense? I have attempted to make sure the models I use are real and the numbers accurate. However, I would encourage everyone to do their own math.
ASSIGNING A VALUE
Assigning a value to a dental practice is always difficult. No other business models really fit very well. This is true for several reasons. First and foremost, it is not unusual for a dental practitioner to take 40% to 50% of the yearly production of the office as profit. Some of this profit comes in the way of perks—advantages for the owner that are not taxed. These can include life insurance, health insurance, retirement funds, IRAs, 401Ks, pension and profit sharing plans, travel to exotic places for meetings, computers, automobiles…the list goes on depending on the ingenuity of the dentist’s accountant and the rules of the IRS. It is rare for another type of business to generate this percentage of income from a similar level of production or sales.
The bottom line, however, is whether the profitability of the practice is high enough to justify the price. You can use all the formulas that exist, but if the practice will not generate enough income to cover the cost of all overhead, minus the perks and the debt payment (or, if the buyer has enough cash to buy the practice outright, a reasonable return on that investment), and leave enough profit for the practitioner to live, the purchase does not make sense. How can this be determined? It is possible to devise a spreadsheet that will allow it to happen by just plugging the various amounts into the appropriate slots. However, it can be done with simple paper and pencil. Lets look at three examples: a small practice, a medium-size practice, and a large practice.
A $10,000 PER MONTH PRACTICE
This practice has a production of $10,000 per month and collections of $9,500 per month, or $120,000 per year production and $114,000 per year collections. Bad debts are $600 each month or 5% of production, a common percentage that with careful management could be reduced.
A $45,000 PER MONTH PRACTICE
You may want to keep the selling dentist on as an associate. However, if you do, you must make a profit on the procedures done by the previous owner and have control over which patients he sees and how much he works. It makes sense to have the previous owner there if you make 10% to 15% on his production. He should see no new patients unless the new patient insists on seeing him, and he should only see those existing patients who insist on seeing him. If this is not enforced, the transition to the new dentist will never happen. This is especially true in the large practice we will look at next.
A $1,000,000 PER YEAR PRACTICE
Now let’s look at a large mature practice. This practice has a productive senior dentist, several associate dentists, and a hygienist. There is a large staff and large facility. It probably has equipment of varying ages, from new to quite old. It probably also has many of the toys dentists seem to need: air abrasion, digital x-ray, apex finders, multiple x-rays, nitrous oxide, intraoral cameras, etc. All those things we can practice without, but really like to have. Its production is $1,000,000 a year—“the seven-digit practice.” It is truly a business, and its purchase must be treated as such (Table 2).
RISKS AND REWARDS
The numbers used in the above examples were taken from real practices. The small practice model would be typical of an older dentist who kept working while the practice declined, because he or she wanted to work less. In many cases it may be a way to get out of the house every day and see your old friends. They can be a bargain when you find one, but they must be made to grow, and grow rapidly, if they are to be viable.
Dr. Quarnstrom has received fellowships in the Academy of General Dentistry, American Dental Society of Anesthesiology, and the International College of Dentistry, and is a diplomate of the American Board of Dental Anesthesiology. He is a clinical assistant professor in the Department of Dental Public Health Sciences at the University of Washington School of Dentistry and is on the faculty of Dentistry University of British Columbia. He has authored 30 papers and three manuals, and continues to conduct research in nitrous oxide sedation, electronic dental anesthesia, and Halcion oral sedation. He has been in private general practice in Seattle since 1967.