From the desk of STAC Bizness Solutions CEO, Shawna Aho
Thinking of selling? Or just curious to know the value of your practice in case you do decide to put it on the market at some point?
Many dental practice owners are well-wide of the mark when placing a value on their prized asset. They overvalue it and under-prepare for their exit, believing in a huge potential for their practice that buyers unfortunately don’t see.
Your practice is only worth what someone is willing to pay for it!
Having an inflated price fixed in your head can seriously hold up your exit strategy. Awareness of the factors considered in determining practice value will help you avoid nasty surprises when you do take the plunge.
Some factors are obvious, others not so much. Some you have control over; and others you don’t.
Understanding what influences your practice’s value enables you to take informed actions to increase it in the coming months or years.
Below is a boiled-down guide to ten of the most important considerations…
- Reasons for selling
Why are you selling your practice? If you’re forced to sell (and this is known by the buyer), the value of the practice naturally falls.
Selling due to owner illness is a good example where you are in a poor bargaining position when it comes to selling.
Try to give yourself as long as possible to negotiate before you sell; rapid, forced sales will ultimately be detrimental.
- Size of your practice
With all other things being equal, smaller practices are often viewed as higher risk than larger, more established practices.
The very fact that the practice has more employees and generates higher revenues may be seen as a sign that it is strong. After all, it must have survived difficulties in the market in the past and possesses the people and processes that have created an environment for growth.
A larger practice tends to indicate stability — and prospective buyers like to see this.
- Longevity of your practice
How many years has your practice been operating?
While potential is a very important factor in determining value, so is a strong track record over many years.
If you can demonstrate years of strong performance, steady cash flow, and an established loyal patient base generating stable recurring revenues, you are ticking many potential buyer boxes.
Practices that have been operational for just a year or two are far higher risk, even if they are performing well. They may be simply riding the market or a particular trend.
- Location of your practice
The location of a dental practice is one of the most critical factors in its valuation. A practice situated in a densely populated urban area with high foot traffic will generally have a higher value compared to one in a rural or less accessible location. Proximity to other businesses, schools, and residential areas can also enhance the practice’s attractiveness to potential buyers.
- Facilities and Equipment
The condition and modernity of your practice’s facilities and equipment can impact its valuation. A well-maintained office with up-to-date dental technology can attract higher offers. Buyers are often willing to pay a premium for practices that do not require immediate investment in upgrades or repairs. Efficient use of space and a pleasant environment for patients also contribute to higher valuations.
- The key financials: EBIT
What are your practice’s earnings before interest and tax (EBIT)?
Any prospective buyer will want to know this figure as the most common basis for calculating the value of a practice.
It essentially puts a figure on your profit. This includes all the expenses in the practice, except interest and income tax expenses.
Another way to put it is: the difference between operating revenues and operating expenses.
A multiple of EBIT is a common method of valuing a practice. For example, a 2 times EBIT multiple for a practice with an EBIT of $400,000 gives a $800,00 valuation. Or a 4 times multiple on an EBIT of $500,000 gives a valuation of $2.0M.
What is considered a ‘normal’ EBIT multiple to use for dental practice valuation purposes? As of this writing, EBIT multiples for dental practices are in the range 3 times to 4 times. However, keep in mind that this ‘normal’ range can be significantly impacted not only by the factors listed in this article, but also by market sentiment – both nationally and locally. For example, in a ‘bull market’ when there are a lot of potential buyers, valuations are higher and a practice could attract a buyer willing to pay a 5 times EBIT multiple. That same practice within a different market environment, with a less bullish sentiment many only attract a 2 times EBIT multiple.
Clearly, timing matters.
- Future performance & projected cash flows
While past performance can demonstrate financial stability (very important), it’s future performance potential that will get buyers’ eyes lighting up.
It’s important to be able to show growth potential. With this in mind, how well does your practice attract new patients and boost cash flow?
The size and loyalty of a practice’s patient base play a significant role in its valuation. A large, active patient base with regular return visits indicates a stable and reliable source of future income. Additionally, practices with a diverse demographic mix may be more valuable, as they can cater to a broader range of dental needs.
Legal and Regulatory Compliance
Compliance with legal and regulatory requirements is a must for any dental practice. Practices that adhere to all relevant healthcare regulations, including licensing, health and safety standards, and patient privacy laws, are viewed more favorably. Any history of legal issues or non-compliance can negatively impact the practice’s value. Buyers prefer practices with clean records and no pending legal liabilities.
- Structure of the deal
The way the sale is structured may affect the price you sell for. Flexibility to fit in with the needs of the buyer may help you command a higher overall price.
There are different ways to structure a deal, affecting the amount of tax payable:
Here are some basic guidelines:
- As a seller, the objective is to maximize the amount of profit subjected to a more favorable capital gains tax rate. The most effective approach is to allocate a smaller portion of the purchase price to the assets subject to ordinary income tax and allocate a larger portion towards goodwill that is subject to the more favorable capital gains tax rate.
- Familiarize yourself with deductions specific to the sale of a dental practice. Expenses like broker fees, legal fees, and advertising costs can chip away at your tax liability, so make sure to take full advantage
- The cost of access to capital in the market
When interest rates are high, investors borrow less. It’s the rule of the market.
This naturally has an effect on the value of your practice as there are fewer potential buyers; and any interested parties may drive a harder bargain than when capital is cheaper and more available, as the perceived risk is higher.
- Other ‘intangibles’ in the practice
The value of any practice will also depend on other more subjective, intangible factors. These may change with the perceptions of different buyers and may be harder to quantify:
- How crucial is the owner to the success of the practice?
- Is it located favorably?
- Is the management team and office staff strong — and likely to stay if the practice is sold?
- Are systems, processes, and procedures clearly defined and documented?
- What is the practice’s reputation in the market?
- Is it favorably placed against competitors?
- How marketable is the practice?
Focus on what you can control!
Now you have an idea of the main factors involved in valuing your practice, what are the next steps?
Beyond being prepared and making sure that all your paperwork is in order (including cash flow statements, historical and projected profit and loss statements etc.) make sure you have an exit strategy planned.
This should be flexible enough that you are not in the position of HAVING to sell for less than you would like.
Focus on the factors that you can control rather than those you cannot. This will help you get your practice into the best possible health for when the right opportunity comes along.
Whew… I know. It’s a lot to think about, but you don’t have to go it alone! Whether you’re actively looking for a buyer for your practice or proactively looking to build value in your practice for a sale years down the road, we can help! Feel free to give the team at STAC Bizness Solutions a call at 844-424-9637 or email us at info@stacbiz.com.
LET US KNOW WHERE WE SHOULD WE SEND YOUR FREE GUIDE!
7 Key Financial Practices That Separate Thriving, Growing Practices From The Rest.
There’s no denying it. Creating a thriving practice is about much more than practicing medicine!
Topping the list of “other” priorities is your practice’s financial management. In this short guide, the experts at STAC Bizness Solutions outline 7 financial best practices that differentiate struggling practices from those which are highly profitable and experiencing healthy levels of growth.