Avoiding the Pitfalls of Dental Partnership Transitions-Establishing Valuation

It is very important to recognize that the associate buying in should NOT have to pay for all of the growth that he or she created since entering that practice as an associate. The formula that I recommend is that the associate pays for 50% of the growth. Here is my rationale. The associate (buyer) is producing dentistry on the seller’s patient base. Without that base, no dentistry would be produced. So credit the owner. But the associate was talented enough to diagnose, conceptualize, sell and perform the dentistry. So credit the associate.

Illustration: A practice was collecting $900,000 when the associate first joined the practice. Two years later, the practice is collecting $1,600,000 of which $500,000 is from the associate’s production. Subtract $250,000 from the $1,600,000 and the Collection number on which you base your valuation is $1,350,000.

What is a fair valuation? Appraising the value of a dental practice is based on a professionally prepared analysis that takes a large number of factors into consideration. Included would be- but not limited to: net profit (what is left over after you pay all the bills); are collections decreasing, flat, or increasing; number of new patients; insurance participation (dependency); age of equipment; level of technology; esthetic appearance of the office; practice location – good neighborhood or changing population dynamics; number of dentists in the area. The list is long. And then you need to factor in the current supply/demand ratio.

Based on my observations and experience, we definitely are in a seller’s market with more dentists looking to buy than doctors willing to sell. A diminished supply of quality practices for sale is driving higher practice valuations – often in the range of 70-75% of a weighted average of the last three years collections.

The poor performance of the stock market in the first eleven years of the twenty-first century has dashed the retirement hopes and expectations of so many dentists. They simply have not been able to accumulate the necessary funds to retire from practice and maintain their life style. As long as they keep working, they are financially OK. But they simply can’t afford to retire.

Recommendation.  Hire a professional to perform a practice appraisal as soon as an associate joins your practice. This will avoid arguments down the road.