Understanding Practice Value

Understanding what is being sold in a practice transition is the cornerstone of comprehending practice value. The most valuable parts of your practice, by far, are the patient goodwill, staff, and systems. Other items that have value are the practice location and office space. The least valuable items are typically the assets, equipment, and supplies.

So, how is practice value determined? Many “rules of thumb” methods have been floating around for years. One such method is to take the average for the last three years of collections and multiply that by a set percentage. However, if you think about that, does that make any sense? Would a practice with $1 million in collections, with an 80% overhead in a low-traffic location, be worth more than double what a $500k collection practice with a 50% overhead in a fast-growing suburb would be?

Most doctors will want professional help to determine their practice’s value, since the old methods like basing it on the prior three years’ collections can be misleading.

To determine an accurate practice value, it’s crucial to look beyond yearly collections and focus on three main factors:

• Market Value: This includes factors such as location, supply & demand, area growth, and demographics.
• Investment Potential: This includes practice collection trends, types of procedures, reproducibility, growth potential, active patients, new patients, and insurance plans.
• Comparable Sales: This is what other practices are selling for in your area.

What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.  It is a financial measure that takes your net income and adjusts out these expenses to more accurately represent the profit of your practice. As you know, every dental practice is unique, and their financial reporting can be very different. EBITDA is important in dental practice valuations, as it helps allow practices to be compared more accurately. The EBITDA of your practice has a significant effect on your practice value. This should also logically make sense, as the more profit and benefit of ownership your practice has, the more valuable it will be to someone else. When looking at comparable sales, a multiple of EBITDA can be established. This multiple will vary based on location and practice size. Average size practices typically fall into a 1.5 – 3.5 multiple range.

Increasing EBIDTA isn’t just about watching your overhead and fees. Recruiting the right people to help execute the practice’s financial goals and holding them accountable is also key.

How to increase your EBITDA?

• Be Aware of your Overhead: Run monthly reports and monitor your practice’s expenses. Ideally, your practice will have an overhead in the 50% – 60% range.
• Increase Your Fees: Your fees should reflect the fair market value in your specific demographic.
• Negotiate your Insurance Contracts: Yes, you can negotiate insurance fees, and you should do it every two years!
• Obtain an Outside Perspective: Look at your practice’s results objectively through a consultant, coach, or another third party.
• Automate What You Can: Can you automate anything in your practice? Verifications, claims submissions, e-billing, or confirmations?
• Recruit the Right People: Do you have the right people in place to help execute the practice’s financial goals? If not, it may be time to recruit or use a third-party partner to help find the right fit.
• Measure Your Results: Are you measuring the results of your Hygiene recall program, or do you feel like it’s successful? Stay on top of this metric and share the results with your team.
• Market to Bring in New Patients: Develop a marketing strategy to increase New Patient count. New patients equal more dentistry; if you earn their trust and care for them, they will naturally spread the word about their wonderful experience with you and your team.
• Figure Out What Works for You: Measure your treatment plan acceptance rate and look for trends. Is there a certain provider or treatment plan coordinator with a higher rate? If so, lean into what they are doing right and replicate it.
• Keep an Eye on Your Metrics: Accurate patient ledgers ensure that everything performed in the chair is billed out. Ensure you are tracking your revenue cycle and accounts receivable performance.
• Accountability: This is the piece that ties everything together.
  • Set clear expectations for the team
  • Obtain buy-in from the team
  • Inspect what you expect of the team
  • Sanction accordingly

What is my practice worth?

As you can see, practice value is tied to more than just collections. To assess the fair market value of your practice, you need to do a detailed practice analysis and understand the market and comparable sales. The best way to do this is to have a professional practice valuation. Benco Dental’s practice valuation service provides you with all the information you need and supports you in identifying ways to increase practice value and improve your practice. Our valuation service is a lifetime valuation, meaning you only pay for the service once, and then we will update it each year at no additional charge. This service is designed to reassure you and provide ongoing support in managing your practice’s financial health.

Most doctors will want professional help to determine their practice’s value, since the old methods like basing it on the prior three years’ collections can be misleading.

For most dental owners, their practice is one of the most significant assets they will have in their careers.  Owners put their hearts and souls into providing the best service to their patients, and balancing that with making a living, managing a team, ensuring you’re getting paid; the list goes on…  Can have massive benefits contributing to your Fair Market Value.  When your EBITDA is higher, and you have a sound business, the value increases, and you will have more serious potential with buyer opportunities.  Understanding your EBITDA and FMV are not only for those seeking to transition.  This is the time to understand where you are, your potential, and where you can nurture your business to seek larger fruits of your labor. By understanding these key financial indicators, you can unlock the potential for significant business growth, which should be a source of optimism and motivation for all dental practice owners.

For more information, please reach out to practicelifecycle@benco.com