Dental Practice Value and the 65% Myth
Summary: Michael M. Karol, DDS Dental Broker, and Consultant explains why it’s essential for dental and orthodontic practice owners to have a professional evaluate their dental practice value.
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At the beginning of last year (before all the lockdowns and virtual gatherings), I attended the Yankee Dental Convention in Boston. At lunchtime, I overheard a conversation between two older dentists that went something like this:
Dr. Tom: “Bob, I’m ready to put my practice on the market. I’ve spoken with my financial advisor and my wife, and we all agree that I can and need to retire.”
Dr. Bob: “That’s great Tom, do you know what the practice is worth?”
Dr. Tom: “Sure, my dental sales guy says that it’s worth 65% of what I produced last year.”
An actual conversation that once again gives credibility to most dentists’ concept has little clue as to what their practices are really worth. Thus, the use of “a rule of thumb” and not a comprehensive evaluation process becomes the incorrect measure for determining a dental practice’s actual value. To follow up on this thought, consider the comparison of two hypothetical practices:
Facts & Data Reveal the Real Value
So, using the 65% estimate, both practices would have a value of $780,000. Are these practices equal in value? Clearly, they are not. In a simplified way, the previous example illustrates to determine the true value of a practice, an analysis of all facets of a practice must be performed. This analysis consists of a complete practice evaluation; done comprehensively by an experienced evaluator.
It must include assessing the dental equipment and supplies’ value, a formulaic survey of the gross income, market value, net income, and profit margin. Subjective assessment by the evaluator also comes into play. One of the keys to the evaluation is that the evaluator is unbiased and uses an unemotional process in arriving at practice value. As has been said many times, “Feelings are not facts.” Applying facts and data is an important concept that cannot be overlooked.
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Professional Evaluation of Dental or Orthodontic Practice Value
Who should consider obtaining an evaluation?
In my experience, any practice owner 50 yrs old or older should have their practice evaluated, regardless of whether they are actively trying to sell their practice. The evaluation provides a real-time overview of how the practice is doing, which is invaluable to current operations. The evaluation also becomes part of the dentist’s financial portfolio, contributing to an accurate assessment of net worth. Besides, life is never predictable: disability, divorce, and untimely death can become an issue at any time.
Contrary to Dr. Tom’s sales guy, the take-home message is that a well-done professional practice evaluation is the only way to establish a dental practice’s actual value.
Michael M. Karol, DDS Dental Broker and Consultant
drmike@usdentalpractices.com | 917.670.0191
US Dental Practices See my LinkedIn profile here
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