Factors That Impact the Value of Your Dental Practice

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Technology, Equipment, and Service Lines Play a Role

By David Herl, CPA, CVA and Jennifer Allen, CPA, CMPE

Dental practices today are more complex than their predecessors of many years ago, with advanced equipment, technology systems, specialized employees, and a wider array of dental services. So, when it comes time for a dental practitioner to think about selling, many factors can impact the value of a practice. Sellers should plan ahead to ensure their processes, technology and patient practices are optimized so they can realize the highest possible valuation when it’s time to sell.

Valuing any business is a matter of telling its story. What are the qualitative and quantitative factors that make the business successful? What are the factors below the surface that place this business above its competitors? For dental practices, the metrics that matter can be measured and reported by the right practice management software. With this kind of technology, practitioners can – with the help of their financial advisors – interpret the numbers and work to maximize value.

Understand Your Revenue Flow

It’s important, when you’re getting to the point of positioning your practice for sale, to understand exactly where your revenue is coming from. You want to identify and report on:

  • Patient demographics by age and other indicators. Is your revenue coming from a healthy mix of new patients and repeat patients, or is your patient base stagnant and aging?
  • Service lines and specialists in your office. How much revenue is being produced by hygienists? How much revenue are you personally responsible for? Examine your service lines and determine how much revenue is coming from restorative services, as opposed to preventive services and diagnostics.
  • Technology has delivered more capacity and greater depth and breadth of services for general dental practitioners today, enabling them to offer certain orthodontic services. If your office does so, how much revenue are those services generating? It’s important to be aware of those trends, and if you decide to embrace them in your practice make sure your internal reporting accommodates them, so you have accurate, timely revenue data.

The Role of Process

The processes you utilize to manage your dental practice are also a part of the valuation story, including the practice management technology you depend upon, equipment, and human resources. Any process that is repeatable should be quantified to bolster the valuation of your practice. This is how you can show that your processes and financial results are above the competition’s when it is time to sell your practice.

Some of the process factors that should be analyzed and tracked include:

  • Payments and scheduling. What is your collection rate? How robust and effective is your scheduling process? If you have many cancellations, do you have a process for filling those cancelled appointment slots?
  • Human resources and division of labor. Having the right people on board to deliver patient services and manage your practice is key. Utilize your practice management technology to determine how much revenue each position is generating in your practice, including each hygienist, diagnostician and specialist. Moreover, if you personally are spending less than 80% of your time generating revenue by delivering patient services, you may be spending too much time on practice management, which means you’re leaving money on the table. Consider hiring someone or outsourcing those processes that don’t generate revenue.
  • Your patients. How many do you have, and how many do you see on a typical day? What is the mix of new patients and repeat patients? Are you generating a healthy number of new patients each month, on average? How many patients are coming to you for multiple services?

These are all metrics that you can impact if you want to change the numbers to maximize value. Marketing and advertising can help you grow and diversify your patient base. Investments in technology and equipment can help you expand patient service offerings and derive income from new procedures. A good practice management software package can analyze and report on all the metrics you need to truly understand how your practice is doing and where you can make improvements.

But you need to know how to review and interpret the data, and a regular monthly or quarterly meeting with your accountant can help you determine which data to utilize that will help you improve your practice.

Looming Trend

A pivot point is approaching in the dental practice market that practitioners looking to sell in the next few years should be aware of. Historically, this has been a seller’s market. Retiring dentists found plenty of younger dentists to buy their practices, and price multiples have remained stable for nearly 50 years at an average of .67% of annual revenues.

But now the paradigm is shifting. In the next three years, there will be more retiring practitioners trying to sell practices than interested buyers. This will likely impact valuations, and it remains to be seen what effect it will have on price multiples.

This means sellers will have to be diligent about making improvements to their practices to earn a healthy multiple when they go to market. Multiples of 80% to 90% are not unheard of, but they require significant investments in technology, equipment and human resources.

For the practitioner who is three to five years out from selling a practice, it is time to take stock. Is your technology up to date? Is your equipment state of the art? You will likely be marketing your practice to buyers who are recently out of dental school, and they will expect the most current technology, equipment and practice management processes. So, an investment – even a significant one – in those areas should help you leverage a higher value for your practice.

If you have questions about how to prepare your dental practice for sale, contact your Adams Brown advisor.