A quick quiz: If you sold your practice today, what do you think it would it be worth?
a) 150 percent of annual revenues
b) 120 percent of annual revenues
c) 100 percent of annual revenues
The answer for most practices is actually “none of the above,” as it is more likely to fall somewhere between 70 percent and 100 percent. This works out to be the equivalent of just a few hygiene appointment fees for each active patient you have. (Actually, I don’t even recommend using just revenue percentages to talk about practice value, since so many other factors come into play, but I use it here to illustrate this point since most practices fall into this range, no matter what methods of valuation you use.)
This is an astonishing reality that many dentists find out too late – that their practices do not have the market value they expect. Why is this? Considering their revenue potential, why are so many dental practices seriously undervalued?
One reason is that many owners don’t look at practice value the right way. They follow the traditional trajectory of “work until retirement, then sell and walk away.” But by that time, they have aged, their team has aged, their patients have aged and their facility has aged. They may also have already cut back on their time in the practice and slowed down. What you have then is a practice that is showing its age and producing well below capacity, so it sells at a discount.
But even practices that are thriving and current can have a difficult time realizing their true value in an end-of-career brokered sale. That’s largely because there are simply very few new dentists who would have the highly developed professional skills and the economic resources required to step into that situation. So an established dentist can spend an entire career building a successful million-dollar-a-year practice and end up finding no takers at the end – at least not at the value the practice should be getting.
It doesn’t have to be this way. Often, the dentist in the first scenario can stop bleeding value, the owner of the high-performing practice can see a fair return for what he has built, and the new dentist can work her way into a great ownership opportunity – if they take a “value transition” approach. It’s a carefully planned, measured and progressive approach at transferring equity that I have found to be hugely effective at optimizing value for all parties involved.
There are still going to be times when a brokered exit makes sense. But for a good many dentists and a good many practices, a structured value transition is the solution that brings the best results. If you’re 10 years away or less from retirement, or even in a mid-career over-saturated situation where you think you’re not getting full value from the practice, you owe it to yourself to find out more about how this works. As it happens, I have a fairly comprehensive online course on the subject that you can watch right now. Because this is not something you want to find out about when it’s too late.
(If you enjoyed this article, click here for more practice management advice from Imtiaz Manji.)