Check the Bottom Line: Profitability Impact on a Dental Practice Appraisal

An NAPB dental practice broker sees many scenarios when it comes to dental practice transitions. In an effort to save yourself a tremendous amount of time and trouble, let’s look at a few case studies to safeguard your primary asset—your dental practice.

By educating yourself and paying attention to profitability, you can be well-positioned when you arrive at your dental practice transition. First and foremost, look at expenses, especially competitive vendor products and services. These expenses often are inflated and they can greatly impact your bottom line.

Case Study #1: Dr. X has a practice running along smoothly. He is getting ready to retire in a few years. He is operating under the assumption that when selling a dental practice, the practice is worth about 65% to 75% of the previous year’s gross revenue. There are a number of factors that influence those percentages and therefore influence the dental practice valuation.

When crunching the numbers, Dr. X noticed that his net income had not kept up with his steadily-increasing gross revenue. Dr. X had some overhead that needed to be trimmed down before listing the practice. Specifically, his hygienist had a brother-in-law who provided dental supplies. Therefore, it had been quite some time since she had looked at pricing from other vendors. When she shopped competitively and shared the other vendor offers with her brother-in-law, he was able to meet their pricing, reducing his prices and saving the practice money.

Case Study #2: Dr. Y is new to practicing dentistry, but she is interested in keeping her practice as profitable as possible. She is building her practice at a steady rate, developing and cultivating patients, and becoming established in her new community. When she looked over her books, she found that her lab costs were higher than the industry average.

Lab expenses usually run about 9% of gross income and her lab expenses were at 12%. She sent all her lab work to a lab operated by a friend from dental school (and had done so since opening), but when she did some comparison shopping, she found that other labs offered the same services at a much lower cost. Dr. Y’s friend wasn’t able to match the other vendor’s pricing so she switched labs and saved 3% of her gross income, about $12,000 every year.

It’s a good idea to keep an eye on expenses whether you are just starting out or contemplating retirement. Some seemingly small changes can have a considerable effect on your dental practice appraisal—a vital part of pricing when you are ready to sell a dental practice.

A local dental practice broker can be an imperative resource to define the appropriate percentage ranges for expenses in order to keep your dental practice profitable. Call for a free consultation today.


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Think like an MBA for your Dental Practice Transition

In some capacities, a dentist is similar to a advertising creative. Most doctors are all over the “creative” and even practical aspects of their job performance, but they are not always paying close attention to the business side of things like tax implications, an easy-to-understand accounting system, a current fee schedule, etc.

When considering a dental practice transition, it’s important to build a team to help support your strengths and hold your feet to the fire in areas of weakness. Consulting with an NAPB dental practice broker is a good place to start, especially when you are planning to sell your dental practice.

The way the practice “feels” like it’s running and the concrete statistics to measure the practice’s productivity are two very disparate things. In fact, for a dentist to approach a potential dental practice transition, it’s vital that they be armed with all the facts. It’s funny. A practice can seem to be flourishing, but when you crunch the numbers, you may find areas of inefficiency or possible improvement. To the contrary, the doctor may feel that the practice isn’t performing well; when in fact, the practice is doing extremely well. With a workable accounting system, it’s a measurable certainty because the dentist can easily see that the practice is cash-positive.

Just as you would rinse out a patients mouth after polishing their teeth so you can examine their teeth for cavities, it’s important to take those same types of necessary steps on the business front. Those same fundamentals applied to the practice of dentistry are also necessary when working towards a dental practice transition.

Fee Schedule: When a dentist is thinking about retirement, they will often not have the financial need to increase their fees. The problem with this strategy is that the buyer is coming into a practice where they are going to have to raise fees right away. At a time when there’s a lot of change, it works better to schedule incremental fee increases with your patients along the way so it’s not a financial shock right when your patients are adjusting to a new doctor. Also, from the seller’s perspective if you don’t keep your fees current, you essentially lose money two times—once when your fees are two low during day-t0-day operations and again when your buyer insists that you lower your asking price. When selling a dental practice, having a current fee schedule is imperative.

Profitability: When selling your dental practice, there’s a “sweet spot” where practices are most attractive to buyers. For most practices, if they are netting 40% more before payment for services, they will be listed at the highest price. With this percentage, the buyer can count on 26% – 32% for the doctor and it leaves 8% – 14% for any monies owed to the practice as well as any needed practice improvements. Many times, if a practice is netting less than 40%, it’s often because the fee schedule isn’t current.

The object of the game is to make it as profitable as possible while you’re working there (and to make it as attractive as possible to a buyer when you’re ready to sell your dental practice). If you’re current with fees and the practice is profitable, then when you’re ready to have a dental practice valuation, you’re more apt to like the results.

Consult with your local dental practice broker today to “think like an MBA” when working on your dental practice transition.


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Make the Most of your Dental Practice Transition

When selling a dental practice, most sellers are focused on three things:

  • Timing of the sale,
  • An accurate listing price, and
  • Their bottom line (in terms of cash-in-hand).

No dental practice sale is exactly the same, but there are measures that can improve the end result. Some of these strategies may seem obvious while a few are a bit more involved. Let’s consider the ways that you can increase your bottom line when selling your dental practice:

Investments in Human Resources: Often, the seller isn’t aware of the appeal of a well-trained, productive team. I’m personally much more attached to my dental hygienist than my dentist. Forgive me, doctor but it’s true. Seriously, a team of employees can really make your practice more attractive and allow you to list it at a higher price. When they make their dental practice transition, the buyer doesn’t have to overhaul the staff. In cases like mine, there will most likely be greater patient retention if patients are familiar with and like the existing staff. When purchasing a well-staffed practice, the buyer doesn’t miss a beat. They can come in and just continue moving forward, making improvements to the practice from a place of strength.

Upgrades: The fact is: the look-and-feel of the office itself is an area of perceived value. Especially when it comes to furniture and décor, which is all the more reason to update and put a fresh coat of paint on the place. You’d be amazed what a difference that makes (and small, inexpensive improvements as far as the look-and-feel can greatly impact the buyer’s first impression and the worth of the practice. There are a number of consignment furniture stores where waiting area furniture and office furniture can be updated for a fraction of the retail cost. Improving equipment often requires a greater out-of-pocket cost; but again, if the buyer is impressed upon entry, then upgrading equipment is an expense that you can potentially recoup when you sell.

Profits: Ask yourself: Is the practice currently profitable and has it been profitable for awhile? Is that a trajectory that seems like it will continue? Understandably, if a buyer comes in to look at a practice and it’s seemingly on the decline, there’s less instinct on the buyer’s part to make the purchase. It’s also an indicator that the buyer may have a lot of work in store for them to get the practice up to speed. On the other hand, if it’s clear that patients have booked appointments months in advance and the practice is obviously making money, the buyer may have increased enthusiasm in this case, the buyer may be willing to pay more for the practice, and their loan will most likely be easier to fund and get approved by the bank.

When you are considering selling your dental practice, and one or more of these areas is not up to par, there are a few things you can do before you list the practice. First, cultivate existing patients and beef up your reminder system for returning patients. Secondly, ask you patients to recommend your services. Thirdly, make a plan to update the office. Finally, hold a seminar or a team-building lunch for your staff. Make adjustments if necessary, but ensure that you are in good shape in the human resources department before you sell your dental practice.

Consult with your NAPB dental practice broker today to make the most of your dental practice transition.


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Seven Parts of a Dental Practice Appraisal

We recently stated that a dental practice valuation is the first step to prepare a practice for sale.  Once completed, the next step is to implement a dental practice appraisal. The appraisal complements the valuation with an accurate value of a dental practice.

Maximizing value and substantially increasing the probability of the seller receiving their asking price is the reasoning behind preparing this report which, generally is between seven and ten pages and covers seven key variables of a dental practice.

1 – Summary of the Practice

The summary of the practice provides a history of the business and its owners (dentist or dentists). It is an overview that conveys the length of time a practice has operated, its current and past locations, its areas of specialization, and background information on the owner(s).

2 – Gross Sales and Net Profits

This section of the dental practice appraisal usually includes a four-year history. The information reported is based on a practice’s past three-years of filed tax returns and current year-to-date numbers. The practice’s expenses need to be restated to show the real profit and cash flow.  Both personal expenses and non-cash deductions need to be added back to determine its true potential for profits.  Examples of personal expenses might include car-leasing payments and medical insurance of the owners; depreciation and amortization would be examples of non-cash deductions.

3 – Patient Base/ Operations Overview

This section is the breakdown of a practice and what comprises it. It includes the number of active patients, which are patients treated within the past two years, and new patients. Both figures combined serve as good indicators for gauging stability, sustainability, and growth potential. Demographic information on patients is also included in this section, such as the age range of the patient base. The average number of patients per week is presented along with the number of customers treated by the dentist and the hygienist.

4 – Details of Office

Specific information on the facility is provided in this section. It includes the amount of square feet, the floor plan of the facility, and the condition of the business’ equipment, both office and medical. Additional information includes the purchase price or the leasing terms of the physical location.

5 – Community Demographics

An overview of the area explains the type of community surrounding the dental practice. Usually, it is cited whether the area is urban, suburban, and small or large. It also may include the population and an economic breakdown of the community, that is, working class, middle-class, upper-middle class, or upper class. Strengths and positive aspects of the area also are included here.

6 – Fee Structure

The income generated from each procedure and the percentage of the total income each procedure represents is the vital content of this section. The fee per procedure also should be included.

7 – Office Hours

The man-hours of the entire staff and the office hours are included here. Office hours of the owner, the associates, the hygienist and staff members of the office are included.

All this information in one report enables perspective buyers to audit the dental practice more efficiently. It is a huge step in pushing the sale forward.


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Dental Practice Transitions: Is it Time for Partnership?

Many different factors may bring you to this question about bringing on another partner or partners to your dental practice. It’s important to evaluate the state of the dental practice in order to come to a solid conclusion. Ultimately, partnership can be advantageous for both doctors, and it’s important to have a clear outline for the structure of a potential partnership. Even within the preliminary phases of contemplating a dental practice transition, it’s advisable to consult with a local dental practice broker.

One primary matter is the question: Can the practice sustain more than one dentist? In other words, are there sufficient patients and enough revenue to support multiple doctors?

Here are a few means of gauging the answer to that question:

  • Capital: How much capital is in savings? For example, would the practice be able to pay the new doctor up to $8500 per month for the first five to ten months while cultivating a more robust practice? How much is owed on the practice? Are there upside-down loans or extensive debt? What percentage is overhead? If the expenses are over 65% of the practice, you’re probably not ready for a partner just yet.
  • Agreement: Are the partners in agreement about the dental practice transition? Specifically, when the new partner or partners come on, are all parties on the same page when it comes to hiring additional staff, improving equipment, and advertising to increase patient flow? It’s critical to make sure there’s consensus to avoid problems in the future. Are all parties in agreement about how the new partner(s) will be compensated. In other words, will the new partner(s) draw a salary or be paid a flat fee or will they be paid a percentage of their gross production? There are pros and cons to both approaches. Consult with your NAPB dental practice transition broker to discuss the options.
  • Patient Queue: Are there patients on the schedule for months to come? Confirm that the existing dentist has an adequate patient base and make certain that all parties are confident that the team will be able to build on a solid foundation.
  • Overall Transition: When bringing on a new partner or partners, the practicing dentist should anticipate a decrease in their take-home-pay, at least during the first nine to eighteen months (or until the new partner(s) increase in business and efficiency improves the overall status of the practice during the dental practice transition.

This is a new reality. In the past, adding partners seemed to increase patients sort of in the vein of If You Build It, They Will Come. However, this is no longer the case (especially in locations where there are multiple practices and/or where lots of doctors want to make their living).

If you already have more patients than you can treat, then consider yourself the exception. In this case, it’s probably the perfect time to add new partners to your dental practice. Taking stock and examining these elements with the help of a local dental practice broker can help make for a successful dental practice transition.


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How to Negotiate Dental Practice Transitions Like a Pro

For a NAPB dental practice transition broker, negotiation is part of the job. From partnership buy-in agreements to space sharing agreements and everything in between, our days are spent dealing with contracts and covenants. Most of the time, negotiations go smoothly, but if one derails, it can cause a tremendous amount of stress, frustration and holdup for all parties.

The ultimate goal when buying or selling a dental practice is for all parties to walk away from the table feeling like they got a “good deal.” Tensions can run high when making such a big transition. The seller may be embarking on a new phase of life and they want to capitalize on years of hard work. The buyer may be just starting out or making a shift in their career and they don’t want to bet on the wrong horse, if you will.

Trusting in the process and having a sense of humor can really help your dental practice transition.

Here are a few tactics to negotiate like a pro:

  • Be knowledgeable: Get a sense of who is sitting across the table. Humanize the person(s) you’re dealing with during the transaction. That aids your ability to stay steady and negotiate from a place of calm.
  • Be flexible: The best solutions often come from unexpected places. If you’re locked into an outcome, there’s no room for those creative possibilities.
  • Be optimistic: You’re receiving guidance from a dental practice transition specialist. There are no enemies here. Everyone wants the transition to go well so approach the experience from a place of confidence that you will find workable solutions for all parties.
  • Be fair: If you ask for something for your benefit, be prepared to give up something to the other party in order to close the deal. Quid-pro-quo. Again, not with an attitude of score keeping, but from a perspective of: How can we ensure this is a genuine win-win?
  • Be realistic: Along the same lines, operate from a place of reality. If you are selling a dental practice with antiquated equipment and a less-than-ideal location, you may have to lower your asking price. Go in with a clear understanding of what’s most important to you, but not in the vein of “let’s make a big stack of cash without improving the practice in any way prior to listing it.” This would be considered unrealistic and counterproductive. You do have to consider the buyer’s viewpoint as well.
  • Be polite: You’d be surprised what can be accomplished simply by being courteous and asking nicely. If you find yourself getting heated or frustrated, take a breath or even take a break. A walk around the building can often alter my outlook in a significant way.
  • Be respectful: Stay right-sized. In other words, don’t operate from a place of inferiority or superiority. Neither will ultimately help you arrive at a consensus.

As we’ve discussed in previous articles, because there is so much intrinsic and intangible value within a dental practice, it’s important to uphold goodwill throughout the dental practice transition process. There is more than just a building, equipment and money changing hands. There’s a history, patient relationships and a presence in the community. All these factors require some fluidity and sensitivity.

Call your local dental practice broker today for a free consultation.


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Determining the Value of a Dental Practice

While the passion of an entrepreneur may fuel a business, the numbers determine the efficiency and success of the business model. Knowing the value of your dental practice is vital if you are planning to sell the business, and understanding the valuation of your business is the first step to selling your dental practice.

The Value of Accuracy

The Internet has placed transparency on a higher plateau than ever before. With the emergence of high-speed Internet, search engines, forums, and social media, we have access to infinite data on endless subjects in seconds.

This ability to research topics so effortlessly has made accuracy and accountability in the marketplace mandatory. Prospective buyers are well-informed decision-makers who are capable of analyzing value on their own. There are no “opinion versus fact-based data” arguments these days that cannot be researched and challenged.

Defining a Dental Practice Valuation

The purpose of doing a dental practice valuation is to calculate an overall value of the business. The process involves a review of historical financial statements, such as the P/L, the cash flow statement, and the balance sheet. An evaluation reviews the cost of fixed assets, such as medical equipment, property value, and current assets, which includes cash-on-hand, accounts receivable, and inventory.

Accountant’s Eye Versus Industry-Specific Analysts

A dental practice valuation is the foundation upon which a smart, selling strategy is built. The analysis provides more than an accurately accessed value of the business.  It also generates an opportunity to objectively determine what could be done now to increase the value of the practice.  A year-to-year analysis of revenues and expenses could raise some points to ponder. Is enough money being spent on marketing to maximize sales? Is it time to redo the waiting and reception area? Would a better online presence get the business more exposure?

While a dental practice valuation is comparable to an analysis of a business operation performed by accountants, it is not the same as utilizing industry specialists. Accountants can crunch numbers and place a valuation on a practice, and a specialist can offer industry trends, business practices, and suggestions for valuation improvement.

Happy Buyer!… Happy Seller!

With the majority of American dental practices selling for less than 95% of the valuated purchase price, having an accurate dental practice valuation enables you to achieve your desired selling price.


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Dental Practice Transitions: A Buyer’s Mindset, Part 2

As discussed in Dental Practice Transitions: A Buyer’s Mindset, Part 1, a solid first step is a free consultation with a dental practice broker. The most important part of buying a dental practice is self-knowledge. What exactly are you looking for when you make the purchase?

An NAPB dental transition broker can help you not only to really articulate your plans but also with creating an outline of the appropriate actions to take in order to reach your aim. For example, a dental practice valuation is assessing both tangible and intangible assets. Knowing what your priorities are can simplify the process and save you a great deal of both time and money. Purchasing a dental practice is a hefty investment and having a plan offers better odds for a successful dental practice transition.

For example, it might be prudent to ask yourself the following questions:

  • Does the patient demographic match my style of dentistry and support my current type of practice or the practice I envision?
  • How do I relate to the existing staff? Vendors? Surrounding community?
  • Is the seller interested in selling outright? If so, does that align with my professional and personal goals? Does the structure of an outright sale support my financial objectives?
  • Is the seller interested in a selling stock in the practice and continuing to work alongside me for a period of time? If so, do our work styles compliment one another?

Once your aspirations are clear, you can partner with your dental transition broker to study specific dental practices. Study is the right word; at this point, it’s vital to thoroughly investigate a prospective practice. It’s helpful to dig into patient files and ask the following questions:

  • How far do the patients have to travel to the practice?
  • How often are patients making appointments (and showing up for them)?
  • What are the most common forms of insurance utilized by patients when visiting the practice?
  • What services have been performed?
  • What services (beyond regular cleanings and checkups) still need to be performed?

Beyond the state of the practice’s patients, it also might be beneficial to have a frank discussion with the seller. Why is the seller selling the dental practice at this time? Look around the building. Is it a well-maintained property? Is there appealing landscaping around the entryway? Are the tangible assets of the practice in good condition?

These inquiries should give you a good sense of the viability and potential continued profitability of practice for sale. Your dental practice broker can assist you and design a customized list based on your particular requirements.

Understanding your ambitions and working closely with a NAPB dental practice broker will give you a list of questions to maintain your buyer’s mindset. Staying in the right mindset will aid your positive experience when buying a dental practice.


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Dental Practice Transitions: A Buyer’s Mindset, Part 1

Many doctors may have unrealistic expectations about their career path. I have talked to a number of dentists who thought that they would graduate from school, start a practice, and then pretty quickly and seamlessly reap the personal and professional benefits. However, sometimes the path from graduation to retirement is not a linear one.

Receiving guidance from an NAPB dental practice broker is wise when thinking about how and when to buy a dental practice.

How to Buy a Dental Practice: Working with a dental transition specialist is smart because there are numerous variables to consider when buying a dental practice. In other words, you can structure the purchase in different ways and all of these factors greatly impact both your personal and professional bottom line.

When purchasing a dental practice, you can purchase the practice outright or you can structure the deal in phases. A consultation with a dental transition specialist may help you clarify your objectives. For instance, do you want to build a practice from the ground up? Or are you interested in collaborating with an established dentist and formulating a slower, mutually-beneficial dental practice transition? How does a dental practice appraisal work?

It perhaps goes without saying that developing a positive relationship with the seller is advisable because their cooperation is integral to the dental practice transition. Also, as you’re working with your dental transition broker, you’ll get a sense of the current landscape, providing you with a better sense of the right time to buy your dental practice.

When to Buy a Dental Practice: Timing is an important consideration when buying a dental practice. When you purchase a practice, it can mean an immediate boost in earnings to the tune of $300,000 to $600,000 during the first decade. Conversely, starting your own practice can mean an investment of a lot more time, energy and effort before you see that kind of return. However, perhaps you’re not as concerned with financial return and you really want to build your own practice. In this case, purchasing a practice may not be the best fit for you. However, gathering information and having a sense of timing will certainly come in handy when you sell your dental practice (years from now).

My strongest suggestion is—Start Now.

Even if you’re still in school, begin investigating with a local dental practice broker and outline what’s important to you when considering a dental practice transition.


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