Your dental practice’s value is probably not on the forefront of your mind as you manage your practice’s day to day operations. However, there comes a time when every dentist needs to know the true value of their practice. If you are listing your dental practice for sale in Austin, or trying to prepare for retirement, you are likely wondering how much it is worth. Unfortunately, unlike a real estate comp for your house or a Kelley Blue Book value for your car, determining the true value of your dental practice takes a little investigation and a lot of experience.
There are several methods dental practice valuators use to determine what your practice is worth including using a multiple of collections, and finding earnings before interest, tax, depreciation, and amortization (EBITDA). While you don’t need to be an expert on these in order to sell your dental practice, it helps to know the basics. Below we explain what each of these methods entails.
Multiple of Collections: A Rough Estimate
When purchasing a dental practice buyers are paying, in part, for the steady stream of collections that takes years to build from the ground up. When using a multiple of collections method of valuation, your practice’s value is determined by multiplying the average of its collections from the past three years by a certain percentage. This method is relatively straightforward and can be a good starting point for those considering listing their dental practice for sale. However, there is some debate over the number to use as the multiplier. Conventional wisdom has the multiplier at 70-80%, however, in our experience, that is not always reliable and sometimes it’s too low for an accurate valuation, depending on the practice.
Our reservations about this method go to it’s main weakness: it does not take into account any other factors that make your practice unique. For example, one owner may have worked hard to keep their overhead costs low compared to the national average, at only 55% of their annual collections. Another owner’s overhead is much higher than the average at 80%. If both practices bring in $1 million in collections each year, the first practice—with its low operating costs—is actually worth more. For this reason, we don’t use this kind of back-of-napkin estimations. Rather, we rely on a more comprehensive valuation prepared by the dental CPAs and certified business valuators at Blue & Co.
Earnings Before Interest, Tax, Depreciation, and Amortization
Using earning before interest, tax, depreciation, and amortization (EBITDA), while more complex, provides a more detailed look at how your practice works. With the increase in group practices, entrepreneurial dentists, and outside investors, using this method has become increasingly popular. When you decide to put your dental practice for sale in Austin your valuator will want to see your debt-free earnings and use that as an assumption for future success.
When using this method, a dental practice’s net income (or EBITDA) is divided by a cap rate, typically a number between 23-31%. The result is taken as the value of your practice. For example, a practice whose net income is $250,000 divided by a cap rate of 30% = a value of around $833,000. As you can see, because this method takes into account your net income rather than your gross earnings it results in a much more accurate picture of what a buyer can expect to take home after the sale is finalized.
What Other Factors are Important?
If you, like most dental practice owners, are saying “wait, what about my real estate?” or “what if I just bought a new x-ray machine?” we hear you. Each dental practice for sale in Austin is unique, and will bring its own tangible and intangible assets to the table. That is why it is crucial to work with experienced, dental-specific practice valuators. At DDSmatch Southwest we work closely with Blue & Co. to provide valuation reports. The experts at Blue & Co. provide a detailed, 70-page report so you can see everything that goes into determining your practice’s value. Here are a few other items that will be factored into your dental practice’s value:
- Practice location
- Fee Schedule
- Referral Rates
- Cosmetic appearance of office including how well-maintained the equipment is
- Payer mix
- Whether office is leased or owned
- Transition plan
- Community goodwill
- Financing availability
Blue & Co. will provide the seller with a draft of their report and allow time for feedback before delivering the final version to the buyer. This report is respected by banking institutions and will give your buyer confidence moving forward with the sale. At the end of the day it is important to remember that your practice is only worth what a buyer is willing to pay for it, which is why it is so important to work with a team like DDSmatch Southwest who knows the local market.
How to Add Value Before Listing Your Dental Practice for Sale
What happens when your Austin dental practice isn’t worth what you thought it was? For dental practice owners, especially those moving toward retirement, we recommend getting your practice evaluated early in the process to give you time to increase its value. Since much of your practice’s value is determined by your net income you should focus on increasing this. How do you increase net income?
First, look at your active patient records and think about how you can increase your patient base. Bump up, or at least maintain, your current marketing efforts to new patients, and focus on creating an environment each new patient wants to return to. Ideally you should attract 25-30 new patients per month with a 12-14% attrition rate.
Next, consider your patient fees. How often do you increase your fees or renegotiate with insurance companies? It may be worthwhile to hire a PPO advisor to help you rework your accepted plans and increase your revenue before you list your dental practice for sale.
Finally, take a look at your overhead expenses. It is easy to fall into a certain rhythm as a small business owner, but you need to be careful with every purchase you make. If you have an office manager make it a point to sit down and discuss every expense, from your office’s electricity bill to your supply of pens. Rather than sticking with what you’ve always done, shop around for the best price. The less overhead cost your practice carries the more it will be worth when you sell.
Retiring? Use the Practice Optimizer Experience
If retirement is less than ten years away, now is the time to start preparing your Austin practice for sale. Giving yourself ample time to prepare, both your own mind and your practice, will ensure a smooth transition when the time comes. The first step you should take is to contact the transition experts at DDSmatch Southwest. We have developed a process called the Practice Optimizer Experience to help dental practice owners retire with confidence.
Our transition experts are concerned with more than just whether or not your practice sells, we want you and your practice to continue to thrive for years to come. Using Practice Optimizer Experience we will review every aspect of your practice and your finances to determine the best time for you to retire, solidify your legacy, and fully prepare you for the future. Here is what you can expect from the Practice Optimizer Experience:
- Conceptual Transition Experience: What do you imagine when you think about retirement? In this first step our transition specialists will help you visualize your ideal future, set achievable goals, and map out strategies to meet those goals.
- Trusted Valuation Analysis: Before you list your dental practice for sale in Austin you need an accurate valuation, using the method discussed above. As part of your transition into retirement we recommend two valuations, one at the beginning of the process and one when you are ready to sell.
- Ideal Retirement Calculation: How much do you have set aside for retirement? Unfortunately, many dentists don’t have enough money to retire and maintain the lifestyle they want. Our partners review your current and future projected income to give you a full financial picture and ensure you are on the right track for retiring on your own terms.
- Estate Preparedness Gameplan: What will happen in the lives of those you love after you are gone? With a well-prepared estate plan you can be sure to leave the legacy you want and provide for your loved ones well after you are gone. We refer you to an experienced, local attorney who will create or update important legal documents including wills, trusts, and estates.
- Dental Insurance Navigator: Don’t list your dental practice for sale in Austin without first reviewing your accepted dental insurance plans. Our transition experts will refer you to a PPO advisor who will take a comprehensive look at your current payer mix. Your advisor may recommend new plans to add, or suggest plans to discontinue. She will also negotiate with insurance companies, leveraging her established relationship with them so you can increase your practice’s revenue.
- Clinical Opportunity Blueprint: There are hidden revenue opportunities in every dental practice. Using Dr. Charles Blair’s “Practice Booster Clinical Treatment Analyzer” we investigate and uncover where you could maximize growth in your practice. In this 70-page report you will find a blueprint for increasing your practice’s value so you can get the most out of your sale.
- Critical Metrics Analysis: Your practice is always changing and evolving. As you prepare for retirement you need to be aware of every change that happens so you can make sure your practice continues to produce at high levels. We provide the customized Practice in Your Pocket Ongoing Report so you can keep track of critical items right from your phone, tablet, or workstation. In addition we will include an annual review of these findings as you work toward listing your dental practice for sale in Austin.
- The Trusted Transition Process™: Finally, when the time comes to list your dental practice, we will start you on our Trusted Transition Process. This tried and true process ensures you know exactly what to expect from your transition. We will work to find the right buyer to carry on your legacy, and make sure you get what your practice is truly worth so you can retire with ease. Our full range of professional services and commitment to transparency means you never have to wonder what is happening with your transition.
Not Sure When to Start? Contact Us Today!
If you are like most of our clients, you probably have a lot of questions about business valuations, adding value to your practice, and when to start your transition. You don’t have to be an expert in dental practice transitions to have a successful sale. The truth is, starting the process early and working with a team of experienced professionals are the best steps you can take toward a smooth transition. We are here to help with any questions or concerns you have. We offer guidance for anyone looking for information about listing their dental practice for sale in Austin and across the Southwest.
Just take it from our numerous client testimonials, like Dr. Bill Wolfe who explained,
“It was a pleasure doing business with [DDSmatch Southwest]. You were able to sell my practice when three other brokers failed. Selling one’s dental practice and retiring from 48 years in dentistry is not an easy, painless decision, but through your guidance (and a bit of counseling too), you made it happen with a buyer to whom I feel very comfortable turning over my practice. Your professionalism was absolutely critical to the successful sale and transition of my dental practice, and I am deeply grateful.”
The dental practice transition experts at DDSmatch Southwest are ready to provide you with a free, no-obligation consultation so you can start preparing for your transition, whether it happens 6 months or 6 years from today. Fill out the request form on our website or call 855-546-0044 to get started.