Thursday, July 14, 2016
We’ve recently seen an uptick in practice purchase/sale transactions involving specialists such as endo, oral surgery, perio, and prostho. Obviously, the vast majority of practice purchase sales we see are general dentistry because the vast majority of practices out there are general dentistry.
A common problem we’re seeing when reading through reports prepared by brokers for these specialty practices to determine selling price is using general dentistry rules of thumb to determine that price.
Here’s what I mean:
One very common rule of thumb as it relates to the selling price for a general dentistry practice is that statistically, the “typical” general dentistry practice will sell for between 60-75% of the practice collections. I know, some will use 80-85% as the top end of the range and even bump the bottom number to 65-70% when using this as a valuation method, at the end of the day it’s still a statistic, a rule of thumb, NOT a valuation method.
The problem we see in some of the reports used to establish the price for these specialty practices is that they’re using the general dentistry statistics of 60-75% to determine the asking price for these practices, and these are NOT general dentistry practices.
You see, most specialty practices are uniquely different than general dentistry practices in that their revenue is derived AND dependent on referral sources from other professionals. Rarely will a specialty practice’s location, name, signage, telephone number or website be the driving force behind their revenue like you’ll see in many general dentistry practices.
Practices, where revenues are driven by referral sources, present a higher degree of risk to any buyer of these practices since these referrals rely mainly on personal relationships with the selling doctor, especially when the practice has only ONE doctor/owner or a part time associate. IF it’s a group practice where the buyer is buying in to an interest of less than 100%, some of that risk is mitigated since there are other doctors/owners who are still working and can retain those referrals and assist in transitioning those referrals to the buyer.
Because there is a higher risk with retaining these referrals and transitioning the personal relationships from seller to buyer, the capitalization rates used to value profits are generally higher than you’ll see for general dentistry practices. Or said another way, the multiples of profits are generally lower for specialty practices compared to general dentistry practices.
Therefore, using general dentistry statistics or rules of thumb to determine the asking price of a specialty practice that depends on referrals will almost certainly provide a false or misleading number in terms of the value of the practice.
So for those specialist buyers out there looking to purchase a practice, just beware of this and make sure you do your own assessment of the practice financials to determine if the asking price is reasonable.