Preparing to Sell – Decoding Practice Valuation

by Alex Zlatin, Maxident

2/3 The Experienced Dentist Pocketbook — A Three Part Series

At a certain point in time, you feel that you have had enough of owning a clinic. At that point in your life you will have new values, wants and needs. If you want to retire right away, I hope you have taken advantage of some advice provided in the first article in this series. If you want to sell but still practice, this article will give you the most important thinking points in this process. In general, you would like to prepare yourself and your clinic on all of the aspects below, as it will maximize the amount you will be paid for your clinic.

We want to explore two groups of parameters, internal and external. Internal aspects are ones that their value highly depends on you and your actions, while external factors are ones that are not as controlled by you and your actions (or perhaps have been determined by a decision you made years ago):

1. Internal
a) Equipment/inventory – Throughout the years, your practice is accumulation a variety of equipment types. At the time of valuation, the type of equipment, whether it is yours or still on a lease and its age will be instrumental in determining its value for your entire practice (and for the new owner). It is obvious that newer equipment is more beneficial, but it is important to note that not only clinical equipment is taken into consideration. Business [estimator/adjustor] looks at the value of furniture, consumable inventory, digital equipment and software/services.

b) Charts – One of the most accurate ways to estimate a value for a clinic is a chart audit for your patients. Looking at those, it gives the valuator an understanding of how many patients repeatedly come for hygiene cleanings, how often conditions are diagnosed and planned, how many and what types of procedures are being referred out. One of the big conundrums is when a valuator is not reviewing all of your charts and only takes a sample. Beyond the fact that a sample, if chosen correctly, is still not as accurate as you’d like the valuation of your practice to be, it is misleading to say the least.

c) Owning the building vs leasing – Although you would always prefer to own the building, in many cases you will be in a long-term lease. An extremely important element of your valuation will be how long is left on your lease and what are the relevant clauses for extension. I know of at least one clinic that is trying to sell right now and cannot do this as they do not have a lease at all. Your landlord has a lot of responsibility for this item, but I qualified it to be an internal factor, as the decisions you have made throughout your business’s life will be the ones that will impact your situation at the time of selling contemplations.

d) Goodwill – perhaps one of the most confusing items in the valuation summary. At a high level, goodwill pertains to unquantifiable assets of your business. As they are unquantifiable, they are estimated by valuators and only as accurate as their assumptions and research. Unfortunately, it will be off more times than none. You have to think of things like, branding, positioning, digital and social footprints and reputation. These assets have been accumulated throughout the years of your business and now it is time to reap your rewards.

e) Staff – Any business’s worth is substantially dependent upon its people. When it comes to evaluating staff, traditional valuators look at traditional dry staff data, like how many years staff has been with you, their credentials, relevant continuous education, their age, years of experience in the industry and other qualifications. However, there are things that they cannot valuate, as they do not know the people. How about trust and commitment to the clinic? These parameters are worth more in the valuation of your clinic than any dry data.

f) Demographics – A lot of experts claim that you should fill your clinic with young families. The reality is, young families tend to not require lots of dental work. So, if your clinic’s patients contain majority of young families, it might not be a viable solution. Young families are important for the continuity of your practice. So, having said all that, to ensure you are successful both short and long term, you need to have a good blend of patients.

2. External
a) Market conditions – With the entry of DSOs into Canada, and with “baby boomer” generation dentists looking to retire and sell, market conditions have changed. It is now a seller’s market, which means you will be able to get a higher price for your clinic. Your benefit is that regardless of who you sell it to, you will be able to sell your clinic for more than it is worth.

b) Competition – Competition is an interesting element to consider when selling. Basically, logic indicates that the less competition you have in your neighbourhood, the better you are positioned when selling. When analyzing competition, you’d like to look at how many new clinics are in the process of being built and time your sale, prior to them opening. Although you have an established practice, beyond the trust and relationships you’ve built with your patients, very little is preventing your patients going to the new and fancy clinic built across the street from you.

c) Neighbourhood – looking at your neighbourhood, you want to look at your latest census and speak with a few local realtors about the outlook for it. Is it seeing more young families moving in, is it becoming a lucrative place to live for the upper class, or perhaps many people are moving away – all these questions will influence your clinic’s valuation. As a general recommendation, trends in your neighbourhood should be looked at throughout the lifetime of your business and not just when planning to sell.

d) Potential – there are two main factors taken into consideration when estimating the potential of your clinic: i. How many existing patients have not been coming back – this is all about your team’s ability to master recare, case acceptance and working with insurance. ii. How many new patients your clinic can attract – in this, you look at the overall percentage of your patients from overall population in the vicinity and growth of new patient percentage vs. new residents’ percentage. Again, working with reputable realtors can save you plenty of research time.

e) Corporate – I had to dedicate a section to mentioning the DSOs. If you are considering selling right now (and are reading these lines) you must thank all DSOs for bringing the market condition to a point where you will be retiring with substantially more money for your clinic. Also, although this route is not for everyone, not all DSOs are made equal and if you have come to a point where you despise dentistry because of all the management overhead, joining a DSO might be a path to explore.

Selling is an inevitable ending to your career. You have invested your best years and endured extreme stress to build it the way you like it. However, it is time to move on. If it is any consolation, right now has the best timing to sell.

In the next article “After Selling – Finding a new life rhythm” we will explore the “day after” your practice sale and the new stressors it could bring

About the Author

Alex Zlatin is the CEO of dental practice management software company Maxim Software Systems (MaxiDent). He helps dental professionals take control and reach the next level of success with responsible leadership strategies. He leverages his experience in “Responsible Dental Ownership – Balancing Ethics and Business Through Purpose”, a detailed guide providing practical tools and a unique, proven approach to running a successful dental practice.;