6 Ways to Increase Your Practice Valuation

If you're looking for info on how to sell a dental practice or tips on a great valuation, this post is for you! Rex Plamann of ddsmatch shares six ways doctors looking to transition can increase their practice valuation.

‍Transitioning out of your practice isn't a snap decision. It takes due diligence, planning, and time — often taking several years. After all, you want to get the best valuation possible, which means, as a seller, positioning yourself in the best possible light for potential buyers.

Here are several metrics and criteria to pay special attention to as you begin planning your transition.

Criteria for a Great Valuation

New Patient Flow

The greatest asset in any dental practice is the patient base. And one rule with patient bases is they are ever changing. Companies and businesses with the strongest customer retention rates still lose 10% of their clients annually.

Take a look at your active patient base and target attracting 10% of that base into your practice as new patients annually. So, if that number is 1,200 active patients, then you need to target 120 new patients per year — or 10 new patients per month. Just to keep your active patient base true, new patients need to consistently flow into the practice.

With regards to potential buyers, new patient flow broadcasts ability to attract new patients in the future. If you are unable to attract new patients, how can buyers or their advisors predict future success?

Lastly, new patients greatly enhance production, since they typically require more dental work. This can predictably pump up production for you and for the incoming new owner.

Utilizing Technology

If you have a bit of time on your side (over 24 months), evaluate your status as it relates to the utilization or presence of tools that can be labeled as “standard of care” in dentistry today. How can we label something as standard of care? If you lined up 10 practices like yours — GP, Endo, pediatric, etc. — what tools or innovations would be found in the majority of those offices?

As an example: intra-oral digital X-ray sensors are now found in better than 8 of 10 offices in any given neighborhood. If you do not have digital X-ray sensors, a comprehensive appraisal of your practice should deduct what this investment would cost a prospective buyer. If this is not deducted up front, it will be an added point of contention or negotiation with your prospective buyer. As such, it will carry a greater negative impact.

New patient flow broadcasts ability to attract new patients in the future

For example, say your practice appraises at $680,000 before deducting the digital investment. And we deem the digital investment to be $30,000 to outfit the office. It would then be wise to appraise the office for $650,000 in order to minimize the negative points viewed by prospective buyers. This, in turn, shows greater transparency to the buyer and their advisors. You are looking for fewer objections from potential buyers at the time you are ready to sell.

Is there time to make an investment like digital X-rays? Only if you have two years or more before you take your practice to market. Remember, you need at least one year to write this off against your net income. Always ensure that all equipment and technology on hand is all in good working order.

Appearance

Aesthetics! We talk about aesthetics all the time in dentistry. But how often do we consider aesthetics when we grade the physical appearance of our practice?

Patients' eyes will be the most critical when it comes to viewing flaws or annoyances they see in your business — much like we do when we visit a restaurant and notice messy floors or dirty restrooms. Over time, owners (practice owner) and operators (staff) become numb to the flaws or imperfections in the practice. View your practice through the eyes of a patient.

Take a stroll through the front door. Take a seat in the waiting room's most frequented chair. Spend a minute looking around and take some notes on what you see. What impresses you as a patient? What doesn't look too impressive? Write these items down. Now go to the hygiene room. Take a seat in the dental chair and adjust to the operative position typically experienced by a hygiene patient.

View your practice through the eyes of a patient

What catches your eye as you sit upright in the chair? How about when you are tipped back ready for a prophy? Again, write down your observations. Do the same with the restroom and your favorite operative room. Be critical of what you see. Sit your staff down, and talk through what you saw — how it could be perceived, and what can be done to improve the appearance.

Or, you could make this a quick activity for your whole staff. Give them a little note pad to take along on their stroll through the practice. From there I would recommend setting aside an hour to go through what everyone saw from their walk, as patient, through the office.

Take the time to discuss what could be done to improve the appearance and perception of your office. Is it a fresh coat of paint? A waxing of the floors? Removal of clutter? Commit to making some upgrades and move on to other matters that will sustain or improve the value of your operation.

Strong Staff

How would you rate your staff? How would someone else rate your staff? Is there a particular member of the team holding you back from reaching goals? A hygienist on the team who doesn’t want to utilize an intraoral camera, for example. They're thwarting efforts to uncover necessary operative work and failing to help to fill holes in your schedule.

They're also holding the practice back from attaining higher production numbers, collection numbers, and net profits. Maybe one of the employees at the front desk is just not friendly enough on the phone. Or perhaps they are sometimes prickly with patients in the office.

With over 20 years of managing all types of employees in all types of roles, I can truly say the old adage of “going with your instincts” usually holds true. Once you get the feeling an employee is not right for the role — or the practice, or the patients — things will remain the same until you make a change.

These situations rarely fix themselves. Leaders need to act and make the change. How does staff influence a practice sale? Or, how does the team influence the attraction of new partners, associates, and other needed future team members?

Make changes when you realize the need

Besides making hurting patient retention and making production goals more difficult to achieve, insufficient staff can also effect the actual practice transition. t does not look good when we show potential buyers the tenure of the team, and two key members are brand new. It is best to make needed staff changes as soon as you realize there is an issue.

Due to many reasons I will not cover here, confidentiality in a practice sale is really valuable, so potential buyers cannot meet staff beforehand. Showcasing your practice to interested buyers always includes a review of staff, their hours, their pay, and benefits packages. Be prepared to explain any anomalies here. Part of the value in a dental office is the staff’s ability to retain the patient base for the new owner. A strong team is so beneficial to the ongoing operations and to a healthy transition of practice ownership.

Keep in mind, often times seller and buyer must work alongside each other in a transition negotiated during the sale of the practice. In these instances, it does not feel good for the seller to realize the buyer is unhappy working with a staff members that has always been less than ideal. I know conflict is not something we look forward to, but I recommend you to make changes when you realize the need.

Communication

Communication is the key to any successful business these days, and it has been for ages. Pay special attention to how you communicate with patients. It needs to remain strong.How do you receive patients when they enter your practice? What tactics do you use for appointment reminders? How are calls being handled during business hours and when the practice is not treating patients? What are your standards for returning messages left by patients, some of which could be new patients?

Great efficiency can be gained by strong communication amongst the staff, including the doctors too. The way you communicate in the office not only impacts production, but can impact patient retention, patient treatment acceptance, and staff retention as well.

Net Profits

Pick a day to review how production has been moving, and work with your accountant to present you will a current P&L statement. Anytime is a great time to work through this exercise! What are we looking for? Anomalies, expense lines with significant movement up or down, unrealized expenses, and collections or A/R.

What do we want to see ?Revenues, expenses, and net income moving in tandem. Even better, we would want to see revenues and net income outpacing expenses. An example of a healthy operating statement would be for revenues (production) to be up 8%, expenses up 4%, and net income up 10%. This is often called “gaining leverage.”

Improving collections can quickly add thousands of dollars to your monthly bottom line

Commonly found in mature practices are revenues that have leveled off or are in slight decline. At the same time, expenses run a bit high for sacrifices that have not been made. As a result, net income falls at a greater rate than revenues. It is always a good idea to review your current expense load.

Variable expense lines are the best place to make adjustments, especially those lines which may not change with production, such as employees or payroll. Supplies are easy to pick on, but should stay in line with revenue movement. If production is down by 6%, automatically supplies and lab should be down 6%.

Adjusting hours with the team is not easy, but will make a greater impact than harassing supplies over composite costs. Check on services or subscriptions that may not be generating returns towards your production.

Collections, or outstanding A/R, is a very costly line item and can bring the greatest impact to slumping cash flow or profits. Improvement in collections can quickly gather thousands of dollars to your monthly bottom line, and can take shape immediately with some focus by your front desk team. If aging A/R buckets reveal significant dollars outstanding, it may be fruitful to employ an outside agency to recover these dollars.

Healthy net profits or cash flow result in practices being viewed by outsiders as healthy operations and result in the practice retaining greater value in a practice sale. Always keep your eye on the operating statement, and take action to keep it strong!

‍Learn more about how RevenueWell improves case acceptance and creates more close-knit relationships between dentists and their patients.