The old rule of thumb–that general dental practices sell for 60 to 65% of last year’s gross receipts–is not always accurate. There are many factors that can impact your practice’s value.
This has the most significant impact on a dental practice’s value. If you live in LA County, your practice may command a value of up to 100% of last year’s gross revenue. Conversely, if you practice in rural mid-America, it may be in the 50% range of last year’s gross revenue. In the Northeast, practice values are in the 70% to 75% range. Why the disparity? Supply and demand. In large metropolitan areas, where many current graduates want to live, there is more competition to buy a dental practice, so you may see higher sale prices.
Practice Net Income
Profitability has a big impact on value. Practices with a low overhead (e.g., 50%) will command a higher value than practices with high overhead (e.g., 70%), as there is considerably more net income available to a purchaser to pay acquisition debt as well as maintain a very good income.
If you have older equipment and have not renovated your office for years or you only have two operatories with no room for expansion, expect a lower value. Many of today’s purchasers are wary of practicing dentistry with older equipment and minimal or no technology. Determine if it makes sense to reinvest in your practice’s equipment and technology to potentially increase your market value.
Many of today’s purchasers are wary of practicing dentistry with older equipment and minimal or no technology.
Another economic variable impacting your value is the practice’s clinical production profile. For example, practices that refer many services to specialists may command a higher value, given the upside potential in retaining more clinical production. Fee schedules below the 50th percentile show greater promise to increase revenue quickly than practices in the 90th percentile. Practices with high-fee profiles can be a challenge for a young dentist with limited experience to acquire since it may be difficult to command the same fee profile after the seller retires.
Practices with a small patient base (500 to 700 patients) and a low number of new patients (3 to 5) per month will command a lower market multiple than practices with a strong patient base (1,200 to 1,700 patients) and monthly new-patient inflow averaging 15 to 20 patients. Practices with a strong re-care program can command a higher value because it is assumed patients in retention will continue to visit the practice, thus ensuring a good revenue stream.
Age of Patient Base
If you have been in practice for 25 to 30 years, you have probably treated several generations of patients. If an analysis of zip codes reveals a significant percentage of your patients travel to you for treatment, this may impact your practice’s value. When you retire, these patients—once loyal to their “dentist”—may opt to switch to a practitioner in their area, reducing practice revenue.
Location of Facility
If you are practicing in a home office, your market value may be very low and consequently will command a lower fair-market value.
It is not all about your tax returns. The above factors and others can influence what your dental practice is really worth.
About the Author:
Dr. Tom Snyder, DMD, MBA, has consulted with dental practices nationwide in creating “win-win” practice transitions. He is the Director of Henry Schein Professional Practice Transitions. Dr. Snyder is a graduate of the University of Pennsylvania School of Dental Medicine and also has an MBA from the Wharton School of Business of the University of Pennsylvania. During his career, Dr. Snyder has lectured at every major dental meeting in the U.S., and he is a contributing author to “Dental Economics”.