We continue to see an increase in practice values in many metropolitan markets throughout the U.S. In a number of urban areas we see general practices selling at prices between 65 to 80% of last year’s gross receipts. In some markets this ratio may be higher and unfortunately in other markets values are lower. So why the wide discrepancy in practice values?
Area Demographics
This factor has the most significant impact on your practice’s value. Where you practice dentistry really counts! For example, if you live in Southern California, it’s conceivable that your practice may command a value as high as 90% of last year’s gross revenue. Conversely, if you practice in rural mid-America, you may see a practice value in the 50% range of last year’s gross revenue. If you practice in the Northeast corridor, you can expect practice values in the 70% to 75% range. Why the disparity? It’s all about supply and demand. It’s becoming increasingly difficult for dentists practicing in small and rural towns to attract anyone as an associate, let alone to purchase a practice. Hence, a lower practice value is the norm. Since 80% of the U.S. population resides in metropolitan areas, trends show that most recent graduates desire to practice there as well. Therefore, there is a greater demand for dental practices in these markets and so the practice values will be higher. Coupled with the fact that less than 2,000 dentists have been retiring on an annual basis over the past six years and compare that against an excess of 5,000 dental graduates per year, it’s no small wonder why this imbalance has been occurring.
Practice Overhead
The second biggest factor affecting your value is how profitable you are as a dental business. Next to location, purchasing a historical income stream is an extremely important consideration for most buyers. Practices with a low overhead of 50%, for example, usually command a higher value than practices with high overhead such as 70%. Simply put, if your practice has a high overhead, it makes it more difficult for a buyer to be successful and thus a lower practice value is a reality.
Physical Plant
Another key factor that can impact your practice’s value is the age and condition of your dental equipment. If you have older equipment and have not renovated your office for years, you should expect to see a lower practice value. The absence of technology will also impact your value as well. So, if you are considering a practice transition within the next five to seven years, you may want to plan for some enhancements which may potentially increase your practice’s market value.
Patient Base
The size of your patient base has a major impact on the success of any practice transition, no matter where you are located, and therefore will have an impact on your practice’s value. Practices with a small patient base (500 to 700 patients) accompanied by low influx number of new patients, for example, (3-5) per month, usually are valued lower as compared to practices having a strong patient base (1,200 to 1,700 patients) with healthy new patient inflow averaging 15 to 25 new patients per month.
Summary
So in the end, your practice’s value is not all about what has been reported on your tax returns, but those key factors I have just presented, especially your practice’s location, will have a major influence on what your dental practice is truly worth.
Thomas Snyder , DMD, MBA
