December 1, 2001
by Bernard Dolansky, BA, DDS, MS
The transition out of dental practice generates its own series of decisions and events that are required to get from active dental practice to a happy retirement. It has been said that in business, indeed in life, timing is everything. A good idea at a bad time will fail. A mediocre idea at the right time can succeed. This adage about the importance of timing is also certainly true about investing. And it is especially true about the decision to sell a dental practice, and timing impacts the value of the dental practice in two ways.
First, the decision to sell requires planning and preparation. Any dentist who has been in practice for 20 years or more should have at least initiated the process of planning for the transition out of dentistry. This process should include getting professional advice on financial planning for retirement as well as a professional practice appraisal to establish the present value of the practice. The practice appraisal that is done early can also give the vendor the time to identify and improve areas of lower value in the practice to realize a better selling price.
The second element is the market conditions that exist at the time of sale. Much has been written about the demographics of the dental profession and its effects on dental practice purchase and sales over the next five years. Most consultants agree that in the present market environment, the key element is the cash flow that comes with an existing practice versus the time required to create cash flow in a start-up situation.
Location, Location, Location
A dental practice is a property and therefore location is a key determinant of value, especially when we recognize that the location interacts with the supply and demand for dentistry in a given area. In other words, an important element in a purchaser’s decision whether to buy an existing practice or set up a new one is how quickly the location of a new office will allow a ramp-up of new patients and the cash flow that results from that patient load. Thus the actual market value of the assets that are identified in the practice valuation will always be influenced by the supply and demand for dental practices in any given area.
A professional dental practice valuation is a document that should answer all the questions of the various stakeholders participating in a sale. This includes the vendor who wishes to know, in simplest terms, what the practice is worth and how it can be made more desirable (more valuable). It also includes the purchaser and the purchaser’s advisors, usually accountants and lawyers, who have a myriad of questions about the assets being bought. As well, there are lenders who provide the financing for the transition and their need to understand the security for their loans. In the evaluation, the principal elements that contribute to market value are the hard assets, such as dental equipment, leasehold improvements, office equipment and furniture, hand instruments and consumables, and computer hardware and software. The second element is goodwill, which can be defined as commercially-transferable cash flow. Let’s examine each of these value areas.
Obviously, this is an asset where both quantity and quality count. That is, how much equipment is there and how high-end is it. The third element that enters into the valuation of dental equipment is its present condition, which, in turn, is influenced by its age and past usage.
Most evaluators give a higher value to equipment ‘in situ’ where it is functioning as part of an ongoing business than it would be worth if it were broken up and simply sold by the piece as used equipment.
It is important to remember that dental equipment and its appearance are a key component of how a practice ‘presents’ to a prospective purchaser. Dentists are ‘techies’ at heart and they relate to tangibles so practices with older equipment or poorly maintained equipment are definitely harder to sell.
All dental offices need the basic structural elements of walls, radiation protective lining, five plumbing lines, substantial amounts of electric wiring, and cabinetry. While these assets do depreciate, they remain valuable to a purchaser as long as long-term secure tenure of the office premises can be assured. Therefore, the existence of a good lease at a reasonable rent with options to renew can positively influence the actual market value of the leasehold improvements.
The decoration and overall appearance of the premises are also important. That doesn’t mean that the dcor of the office has to be very elaborate or luxurious. What it does mean is it has to be clean, well maintained and in keeping with the clientele of the practice. For example, a suburban or small-town family practice may have a very different level of decoration than a downtown big-city cosmetic practice, which, in turn, may look very different than how a working-class district ‘dental clinic’ presents. What is important in selling each of these practices is that the ‘look’ is appropriate to the location and clientele.
Computer Hardware and Software
It has become the norm for dental offices to be computerized, especially in larger or busier offices. Dental practice management software can increase efficiency and provide information that makes it easier to manage the business aspects of a dental office. The use of CDAnet’s EDI system also enhances management of accounts receivable in the practice. If the vendor isn’t computerized, the actual market value of the office may not be greatly affected, but the appeal or saleability factor is.
As stated earlier, the essence of goodwill for business valuation purposes can be summed up as commercially-transferable cash flow. But the actual calculation of goodwill in a dental practice involves the analysis of many other relevant but intangible factors. Some of these factors include: quantity and quality of patient records or charts; existing staff; past history of gross and net income; fixed and variable expenses; recall systems; collection methods and accounts receivable history; fees, services rendered and patient flow; quality and quantity of dental procedures; location of the practice/social and economic conditions; phone numbers; premises lease agreement and potential for the premises; non-competition covenant; competition in the area, and other factors, which may affect the marketability of the practice or restrict or enhance the future earning ability of the practice.
The organizational components of goodwill may sometimes be intangible assets, but the results of all these factors are very tangible. That is why we come back to the cash flow and the history of the cash flow in a practice as the central measure of value from a business perspective.
Another option that might be considered other than outright sale of a practice is bringing an associate into the practice. In a retirement scenario, this should only be done with prepositioned agreements to sell all or a portion of the practice. Also, don’t forget that one doesn’t have to own a dental practice in order to practise dentistry. Many dentists who have sold their practices and stayed on as an associate have discovered that this can be the most pleasant, rewarding phase of their careers. Finally, all the value factors in a given situation have to be weighed against lifestyle considerations such as age, physical health, mental health, attitude towards practice, other financial resources and family situations. When all these are factored in, sometimes the best decision may be to let the practice wind down.
Whatever the transition path, the decisions that need to be taken in regard to retirement require a solid basis of knowledge if the transition is to be successful. Having an excellent understanding of the components of dental practice value can only enhance the chances of achieving that successful retirement.
Dr. Bernard Dolansky is past president of both the O.D.A. and the C.D.A., and is a practising endodontist in Ottawa. He is currently pres
ident of Equity Professional Services Ontario, an Ash Temple company that assists dentists in all aspects of transition planning.