McLerran & Associates Dental Practice Brokers Texas Austin Houston

Fees and Practice Value in a Dental Practice Transition

By Brannon Moncrief and David McLerran of McLerran & Associates

Many dentists claim they don’t have time to apply sufficient attention to business matters such as overhead expenses, supplies and a marketing plan even before a dental practice transition occurs. Others just admit that they have a hard time getting motivated to give business matters the attention needed. The fact remains, dentists should do everything in their power to make time to maintain the business side of the practice especially if they want to sell a dental practice in the future.

Every day, dentists all over the country will call their accountants or other advisers and say, “I feel I’m not doing well.” When these same dentists are subsequently asked about the status of their practice’s production, collections, overhead, new patient visits, total patient visits and recall activity, the response most often given is, “I don’t know.” Not knowing the numbers leads to feelings of helplessness and frustration. It will ultimately result in dental practice owners making uninformed decisions based on subjective judgment.

Taking X-rays of a patient’s mouth in order to carefully identify problems and craft the most effective treatment plan is fundamental to the practice of clinical dentistry. No less should be done in the identification and development of the most effective means of solving business problems.

Whether it’s a clinical or business situation, diagnosing the problem and planning possible future courses of action is, in and of itself, a comforting exercise. The equivalent diagnostic tool of an X-ray in the business setting is the practice’s numbers. A good handle on the numbers and what they indicate allow one to take the most effective business steps in matters of staffing, facility enlargement, moving the practice, adding an associate or selling a dental practice.

Despite the obviously positive implications for practice profitability and value, many dentists are reluctant to raise fees in the years leading up to the sale of their dental practice. Most of these prospective sellers are winding down their careers, and thus believe themselves to be financially sound, and are reluctant to “burden” their patients with fee increases. However, a dentist who has not raised fees for 36 months passes on a need for a 9% fee increase if the buyer is to make up ground lost to inflation alone.

“Who cares what the former owner did or didn’t do with the fee levels of the practice? The buyer can fix that problem!” Unfortunately, it’s not that simple. Even in instances where buyers increase fees as a necessary act to cover ground lost by the seller to inflation, the mere act of increasing fees is often viewed by the patients and staff of the practice as a negative act rather than the appropriate adjustment to market. As a result, buyers will rarely purchase a dental practice with fee increases as a key element of their dental transition plan. Rather, they will make a discounted offer for the practice such that the fee structure in place is justified, by the price paid for the practice. In other words, dentists who have been reluctant to keep the level of their fees in line with the quality and method of their approach to dental care delivery, and in line with inflationary increases, end up paying for this lack of vigilance twice — once in the reduced practice income while they operated it, and the second time in the form of the reduced price for which the dental practice is sold.

Dental practices netting 40% or more before compensation for professional dental services are in highest demand. These practices are most likely to ensure compensation of 28% to 30% for the doctor and leave 13% to 15% for debt service and capital improvements. Very often practices put up for sale net less than 40% because their fees are below market for their area. Most buyers are not interested in purchasing a seller’s problems. Therefore, sellers need to correct over-staffing, as well as staff compensation and fee schedule problems before they sell a dental practice. The alternative, as previously noted, is for sellers to accept significantly discounted values for their practices.

Some sellers think that patients will leave if fees are increased. In fact, less than 10% of patients will even notice a fee increase from $650 to $710. The same fee increase made by the seller will result in less than 1% of the patients making an issue of the increase, while the same very reasonable and appropriate change made by the buyer typically creates a real sense of outrage and confusion for a majority of both the staff and patients of the practice.


NAPB | National Association of Practice BrokersDENTAL PRACTICE BROKERS

Dental Practice Transitions Selling a Dental Practice
Dental Practice Valuation Dental Practices For Sale

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McLerran & Associates Dental Practice Brokers Texas Austin Houston

Dental Practice Valuation – The Importance of Controlling Overhead

By Brannon Moncrief and David McLerran of McLerran & Associates

Earlier this year, we met with Dr. V, who is a couple of years away from retirement and wanted to discuss the value of his practice in addition to potential dental transition strategies. He had heard from various “experts” that dental practices are worth approximately 70% of their previous year’s gross revenue. While this “rule of thumb” sometimes holds true, there are many other factors that influence market value, with the most significant factor being profitability. When we brought up the tremendous impact that overhead and cash flow have on dental practice value, Dr. V’s positive demeanor begin to change into one of concern.

Dr. V went on to explain that, while his practice’s gross revenue had been steadily increasing, his net income had not followed the same trend. After examining his practice financials for the past few years, it quickly became apparent that several overhead expenses were much higher than industry standards. This was particularly obvious in his lab expenses, which were running at 14% of gross income as compared to the industry norm of 8-10%, and dental supply costs, which stood at 10% of gross revenue as opposed to the normal range of 5-6%.

Dr. V related the inflated lab expenses to the fact that he did a large amount of crown and bridge work, but our investigation revealed that the true culprit was a high lab cost per unit. Dr. V went on to reveal that his lab technician is a close friend and he had not shopped around in years. By using a more competitive price per unit (without sacrificing quality), we calculated that Dr. V could easily reduce his lab expenses to approximately 8% of gross income, a savings of over $24,000 per year.

We also found that the assistant who ordered dental supplies for the office had developed a close relationship with one of the supply representatives and was not competitively shopping for the best buys. After reassigning this task to another person, the supply expense immediately dropped to a more acceptable level of 6 % of gross revenue, reducing overhead by an additional $16,000 per year.

From this experience, Dr. V learned that his profit and loss statement can serve as a valuable tool to compare his expense levels to industry norms, identify problem areas, and make changes that will lead to increased net income and practice value. He also realized that while gross income certainly influences market value, the net income generated from those revenues has a much greater impact and plays a far greater role in gauging the health of an office. Through making a couple of minor changes, Dr. V increased the profitability of his office by 10% or $40,000, which made a huge difference in his quality of life as well as the value and marketability of his dental practice. That marketability can be achieved and applied to all dental practices for sale, thus increasing their value.

We understand that dentists are busy people and don’t typically enjoy spending a great deal of time analyzing numbers or pouring over income/expense statements. Therefore, we suggest that doctors simply become familiar with the normal range for major overhead expenses (dental supplies, lab, staff, etc.) so that they can quickly notice if something is out of line and move to correct the problem, thus making their time and their dental practice more valuable.


NAPB | National Association of Practice BrokersDENTAL PRACTICE BROKERS

Dental Practice Transitions Selling a Dental Practice
Dental Practice Valuation Dental Practices For Sale

> MORE