Any successful dentist has strived for details to build up practice. He has read books attended infinite CDE courses ,researched and there after procured dental and non dental equipment etc
It would be better for the senior dentist and for his patients if an enthusiastic junior dentist takes over his practice. As would be obvious it would be better for a fresh dentist also of he takes over an established practice rather than spending years or perhaps even decade or more in building up his reputation.
The practice transition needs extensive planning and requires the help of a practice management consultant and as would be obvious main factor is the valuation of the practice.
In this chapter we will consider all aspects of valuation of the practice. There are three main entities for practice valuation..
1. Valuation of dental and non dental equipments.
2. Valuation of real estate.
3. Valuation of goodwill.
Valuation of equipments:-
Prepare an excel sheet which contains all the details of your major dental equipment minor dental equipment and non dental equipment. The Excel sheet must be as detailed as possible and must contain all details of the equipments procured. The following details are a must.
a) Date of procurement
b) Party from which has been procured
c) Price at which it has been procured
d) Whether it was repaired or modified over the years
e) The instruction manuals and warranty cards
f) Insurance details
g) If possible an image of the equipment when it has procured.
Based upon the date of procurement and the amount at which it was purchased work out the depreciated cost of the equipment. In practice valuations the depreciated cost of the equipments is considered.
The following must also be considered
1. Clinic website
2. Patient management software’s
3. Patient education software’s
4. Patient records.
The senior dentist should expect a a remuneration for the same. If all the above are well maintained the senior dentist can expect a premium for the same.
Valuation of real estate:-The real estate should be valued at the prevailing real estate rates in the locality. Other factors which have to be considered are age of the building, condition of the building ,monthly outgoings of the facility ,how is the clinic facility in government records i.e commercial or residential etc.
Valuation of goodwill :- As would be obvious there cannot be an exact mathematical method for monetary valuation of goodwill of the retiring dentist. It is an intangible entity however an attempt must be made in practice transitions to reduce the goodwill to a set of numbers.
Here I will elaborate my thoughts.
To begin with the following have to be kept in mind by both the senior dentist and the incumbent dentist.
a) The age of the practice how long has the senior dentist been practicing.
b) The type of practice: Is it focused on extractions or it is a mature practice focusing on endodontics and conservative dentistry or is a boutique practice focusing on cosmetic treatment. Or is the practice focussing on implantology.
c) How long will the senior dentist practice with the incumbent dentist.
d) If he is not going to practice will he be available for consultations if required.
e) Has the database of patients be maintained so that they can be informed regarding change of guard.
f) Has the clinic website been maintained so that the change of guard can be announced on the clinic website.
g) The qualifications and experience of the incumbent dentist.
Each practice is unique and there are many variables to consider in calculating the true value of each practice including. The parameters to be considered are appropriate cap rates, discount rates, included and exclude expenses. The value you determine on your own may differ from the valuation done by a practice management consultant.
The value of any dental practice like in any business is typically based on its cash flow, the risk of investment and the return on investment for the buyer.
There are various ways in which you can arrive at a amount to value the goodwill of your practice.
Some of them are:
1. On basis of your annual gross professional receipts.
2. On basis of profit margin.
3. Terms of transition:- If the senior dentist will continue to practice then the good will amount will be more.
Now herein I will describe a few methods for monetary valuation of the goodwill amount.
a) Calculate the monthly profit margin of the practice. This figure needs to be multiplied by a number ( anywhere between 60 to 500) and this could be considered as the valuation of the goodwill.
b) Calculate the annual gross professional receipts multiply it by a number ( between 5 and 25) that amount can be thought as goodwill amount.
c) Discounted cash flows for the next 5 to 10 years. This amount should be determined and a multiple of that could be considered as the goodwill amount.
Buyers perspective… It takes time to build up our reputation and goodwill. The incumbent dentist is saved of this time and energy if he buys into an existing practice.
While no definite universally agreed upon formulae can be arrived at for calculating the goodwill of the practice the incumbent dentist will look at
1. Inflation adjusted future earnings
2 The time and the effort saved in building up a reputation and credibility if he buys an existing practice.
An attempt must be made to convert this time and effort to a set of numbers and that is the goodwill amount.
While no doubt the profit margin and the gross professional receipts are the basic monetary and the accounting numbers to be looked at in valuation of the goodwill , the incumbent dentist should also look at the state of the practice .
The basic parameters to be looked into are :
He should look at the
1) Number of active patients
2) Number of new patients the practice is attracting
Announcing the transition:-
Rascally the patient comes for the dentist. He visits the clinic based upon the reputation credibility and the standing of the dentist. If he visits the clinic and finds that the senior dentist has retired he may shift elsewhere.
So the transition needs to be announced so that patients are aware of the transition
The transition can be announced is various ways.
It must be done in a manner that the credibility and the standing of the practice actually increases. The transition needs to be announced especially of the senior dentist is leaving the practice.
As would be obvious the best arrangement is the one in which the senior dentist also practices for a period of time.
REGULAR VALUATION OF THE PRACTICE:-
Every dentist must accept one formula to calculate the goodwill amount and stick to it for regular valuation of the practice. The valuation of the practice must be written down and compared at regular intervals. Help of a practice management mentor is required for this exercise. A well managed practice must expect at least 10% increase in practice valuation annually. Please note that the valuation of equipment actually comes down with every passing year. However newer equipment is added continuously in any mature practice and this should result in the increase on practice valuation .The goodwill amount will increase if the carry home income and the grass professional receipts are increasing with every passing year.
If this is done at regular intervals it gives valuable insights into the state of his own practice. This must be done by even those dentists who are not contemplating retirement. The exercise of valuation of your practice gives valuable insights into the state of your practice & how to grow it in future.
Now every dentist must spend time at regular intervals and value his practice. This exercise needs to be done even if he is decades away from retirement.
The exercise of valuation of your practice must be done at least once in a year by a practice management consultant .
This must also be done by those who wish to shift their clinics mid career. They can either buy into an existing practice in a new locality and sell their practices to an incumbent dentist.
The valuation of practice must also be done even by those who are practicing in leased or rented real estate.
Terms of practice transition:- As usual there can be no universally accepted and generic terms of practice transition. If the senior dentist is still practicing.
A few formulae
1. Senior dentist gets monthly amount
2. Senior dentist gets a percentage of gross professional receipts
3. A percentage of profits.
All of it are in addition to the professional receipts from the work he still does.
In any event the formula must be
1. Simple
2 .Transparent
3. Reasonable and easy on the incumbent dentist
4. Must withstand legal scrutiny.
Any mature dental practice needs to constantly add dental equipment, both major or minor and non dental equipment also.
If the dentist does this semi annual exercise of valuation of his practice it will give him valuable insights regarding the growth of his practice and future investment avenues.
For example if the practice is predominantly endodontics and then investment in endodontic paraphernalia in future will lead to increase in valuation of his practice.
If he is investing elsewhere then he will find that his practice valuation has come down with every passing year
Conclusion:- If the practice transition is well planned then it is an immediate Win-Win situation for everyone that is the retiring dentist the incumbent dentist and most of all the patients.
If the practice transition is well handled it will lead to an immediate increase in practice revenues and patient footfall as soon as the incumbent dentist joins.
For any help in practice evaluation pls contact at : todaysmedicalmarketing@gmail.com
