Author: marketing

Making the Case for Rural and Remote Dental Practices in Canada

Date Posted: 2008/08/03

As a dental practice appraiser and broker, my goal has always been to do the best I can for the vendor dentist whose practice I represent. Doing one’s best usually means undertaking measures to get an offer to purchase that includes the best price for the practice with the fewest conditions and that closes within a time frame that suits the owner. In locations where there is high demand and often an insufficient supply, selling practices is not without challenges. Both vendors and buyers may have high expectations and transactions may move quickly with multiple players involved as several prospective buyers compete for a practice.

However, representing dental practices in rural and remote Canada (and I am not sure where these boundaries start and stop) presents a different challenge. In these “geographically challenged” situations, simply getting the vendor (usually a retiring dentist) any offer, for any price and with any conditions that the buyer wishes to impose is sometimes as good as it gets. The economic drivers supply and demand are certainly at work here — and, if I might suggest, are to blame for this.

Although many successful dentists and dental practices — successful according to whatever measuring stick one wishes to use — exist in non-urban settings across Canada, there are, unfortunately, not as many practitioners prepared to move into these communities and take over and operate these practices.

Why is this? It could be because of some ill-informed negative stereotype of small town life (i.e., fewer cultural and entertainment opportunities, decreased ability to practise one’s faith, smaller schools). There may also be a perception that financial success is not possible (due to less disposable income for health care in general or no demand for comprehensive care). In my company’s experience, it seems that the desire of a high percentage of today’s young practitioners to live in an urban setting is so strong that it virtually excludes any other possibility.

Reasons for Buying a Remote Practice

I posit that there are ample reasons to buy a rural or remote practice!

• The low demand for these practices has made them very affordable (versus their urban counterparts), all things being equal.

• The (usually) plentiful patient numbers ensure that the chance of business success is very high. These practices will be busy — usually from day one.

• The prevalence of dental insurance benefits should not be a source for practice comparison, as small town residents generally have high coverage rates too, making decisions to undertake recommended treatment easier from a financial perspective.

• The demand for comprehensive care by a knowledgeable populace — which is often deemed lower in nonurban settings — is also not a valid argument against owning a rural practice. In my role as an appraiser and observer of hundreds of dental practices, I see as much molar endodontics, Tucker gold inlays, CAD-CAM restorations and cosmetic dentistry being done in rural as in city practices, which indicates to me that there is little difference between locations when it comes to the provision of high-end and challenging services.

• The (perception of a) lower-stress lifestyle associated with rural and remote areas of Canada should, in and of itself, be enough to make them desirable opportunities. I have met dozens of practitioners who have made the move to a smaller community — at midcareer or at retirement — and are pleasantly amazed at the relaxed pace of life and the associated benefits in terms of their general state of well-being. Certainly not having to compete aggressively for patients at the same level as some city practices would manifest in a low-stress environment.

• The ease of travel these days demonstrates that you can have your sports and ballet too— regardless of where you practise and reside.

A Population at Risk

Although I have been agonizing over the difficulty of selling practices for rural and remote practice owners and extolling the virtues of small town life for the practitioner who chooses it, there is a bigger threat looming. At issue primarily is going to be the availability of oral health care in some of these communities (i.e., the lack of it). As retiring dentists are forced to simply shut their doors and walk away — because no one can be found to take over (let alone buy) the practice — patients are going to have to travel farther and farther to have their dental needs met. Others have already written on this subject, so I will not expand beyond this statement.

Possible Solutions

What can be done? I humbly suggest the following.

• A thorough examination of the current Canadian dental school demographic (and the admission criteria for those yet to apply) needs to be undertaken, with a view to determining whether we can predict where today’s graduates might want to settle into practice. Without being prejudicial in any way, schools are going to have to find a way to select students based on the demographic they, as future dentists, are ultimately going to serve.

• Military-like tradeoffs — possibly with reduced tuition — should be considered. For example, require equal time for equal time, where a graduate is expected to work in a certain area for the same amount of time he or she was subsidized while a student. Perhaps more favourable admission criteria (although not from an academic standpoint) for those who commit to practise in specific locations after graduation would be a possible solution.

• Remote-learning opportunities can be created, such as a “residency program” in a private dental office, a local hospital or community clinic. (This is not to be equated with community clinics in underserviced areas of inner cities.) This could expose all dental students — in the senior year or after graduation — to at least some aspect of rural community life.

• Provincial dental associations need to be involved to create links between their members who own practices, and brokers with a view to increasing the likelihood of succession in geographically challenged practices. Word of mouth and networking might help dispel misconceptions of small towns and practices.

Brokers and others who appraise practices have to take into account that some practices are just not as valuable as others. As with the 3-bedroom bungalow that is worth $1.2 million in Vancouver and only $120,000 in Tatamagouche, Nova Scotia, it’s all about location, location, location. I would say to the buyers of dental practices in 2008 and beyond, why pay 5 to 10 times the cost of purchasing a practice anywhere other than a rural part of the country? Of course lifestyle decisions are important, but from a strictly business approach, I maintain that both the short- and long-term returns on investment in a rural practice are better (or at least equal) to those in a city practice. Paying more for a practice does not necessarily mean more success.

I hope these observations – which were penned with the knowledge that the pending shortage of dentists in rural and remote Canada was a topic of discussion at the Canadian Dental Regulatory Authorities Federation meeting in St. John’s, Newfoundland, in October 2007 – might serve simply as a starting point for further debate and dialogue. This can only be for the good of the rural and remote Canadian dental patient, and of course the dentist owner.

Journal of the Canadian Dental Association – July/August 2008

Test Driving a Practice

Date Posted: 2008/06/13

Many of today’s buyers ask if they can work in a practice before making the decision to submit an offer to purchase. While it is a reasonable request, what are the benefits — to the owner or the buyer — and what are the risks?

From the buyer’s perspective:
1. He or she wants to become familiar with the day to day style, systems and philosophy of a practice, to ascertain if it matches with his or her philosophy;
2. The buyer wants to learn if he or she is compatible with the staff;
3. The buyer seeks to discover if he or she can perform the normal scope of treatments and keep pace with the owner — who is usually more experienced and skilled with years of experience;
4. The buyer needs to know if he or she is a good ‘fit’ with the socioeconomic profile of the patients.

From the owner’s perspective:
1. He or she wishes to study the buyer’s personality to determine if they can manage the practice;
2. He or she wants to know if the buyer is able to produce the income required to service the regular overhead and the debt to purchase the practice;
3. He or she also seeks to train the buyer, in advance of a sale, to pass on techniques to help assure continued quality of care.

All of the foregoing is in the genuine interest of both buyer and seller. However, in our opinion, the risks are much greater for the owner, and may have a significant impact upon the practice value (often negatively) if the buyer does not proceed to purchase
the practice.

Consider these risks:
1. Patients and staff may be unnerved by the sudden arrival — and departure — of the associate dentist, and some patients may even choose to go elsewhere as a result.
2. The owner is required to explain that he or she will be resuming their care; this can lead to a loss of income while the owner and staff are burdened with the task of explaining the short-term change of dentist.
3. The owner may have reduced income hours while feeding patients to the associate to ‘impress’ them with the busyness of the practice.
4. Any marketing or introductions of the associate may have to be retracted, causing more suspicions or questions from the community.

We rarely suggest “test-driving’ a practice, unless circumstances demand it is necessary, such as specialty practices or those located in remote areas, where there are few other buyers to seriously consider the practice. Our philosophy has always been to allow a buyer to view the office after-hours, when no patients or staff members are present. We find this policy to be the one that produces successful transitions time and again.

Ontario Dentist – June 2008

Hours of Operation: What’s Best for your Practice?

Date Posted: 2008/05/31

One of the top 10 questions asked when someone is selling a dental practice is: “What are the owner’s hours and days of operation?” Time spent to generate income, and the specific patient expectations as to when that time must be spent has become a key factor that motivates and attracts a purchaser to a practice. There are many views on what hours are best for a specific practice, and the decision may have an impact upon both a buyer’s perception of the practice and to some extent, the sale price.

Today’s buyer is typically a young associate, many of whom have been asked to work evenings and weekends. Principals have earned, and rightfully enjoy the privilege of limiting their practice hours to a more traditional daytime schedule. However, when buyers are considering the purchase of a practice they are quick to suggest that they no longer want the late nights and weekends away from family and friends. Some have remarked: “I have paid my dues, and I want a more regular schedule.” Today’s buyers are ambitious and willing to work hard, but they are more motivated by lifestyle than dentists of previous generations.

Many dental offices are situated in retail plazas and malls. It would be absurd to suggest that these dentists cut back to a “nine to five” work week merely to attract a buyer, but it is also relevant to suggest this does have some bearing on saleability and price.

When a practice is in its early stages, it may be necessary to open evenings and weekends to build the patient base. Some landlords specifically require the dental office to be open during all mall hours (9 a.m. – 9 p.m. for example). Today’s buyers are reluctant to buy such offices, as they simply do not want the burden of staffing the practice with associates if only to meet the landlord’s demands.

These three questions need to be answered by all prospective purchasers:
1. Where do you want to practise?
2. What hours and days do you want to work?
3. What is your family structure and location?

 
Young dentists often mention a desire for less work and more play. This may be due to the generational attitudes of dentists under 40 who often have very different attitudes about when, and how much, they should work in dental practice. They don’t lack the work ethic, however most are ready and willing to make an honest commitment.

Of note is that between 50 and 55 percent of graduates from Canadian dental schools are now women. Female dentists of child-bearing ages may still wish to own a practice (much like men) but they are realistic about the demands placed upon women when raising a family. If you project the predominance of women in dental practice over the next 10
years, it is likely that the most desirable practices will be those who purposely built or designed their schedules to accommodate the next generation of mostly female buyers.

What should you do if your practice is going through a change and your hours are being affected? Should you strive to maintain longer hours and work evenings and weekends and keep your gross up? Should you extend yourself to make the practice value higher? Should you allow a decline in hours worked, resulting in lower gross and net income and thus a lower appraised value?

A dental practice can be altered, in terms of hours, days, policies and services rendered, given enough time, but sudden change in any key operational feature is not recommended in any business. If you choose to reduce or modify your office hours, your loyal patients will appoint during the hours set by the practice.

Do you really need to open evenings or weekends to attract and retain patients? Yes, it is proven that extended hours can attract new patients, especially those in newer residential areas where young families have little choice but to seek evening and weekend appointments. On the other hand, I challenge you to consider the costs of the extra time spent working those hours as your practice matures. Lifestyle is important to the new generation of dentists. You may want to consider modifying your working hours to make your practice more attractive to the buyers of the future.

Ontario Dentist – May 2008

Investor Dentists: Have they Changed the Dental Marketplace?

Date Posted: 2008/04/02

In the year 2007, our firm sold more practices to investor dentists (ID) than in any year previously. These unique buyers have several motives for purchasing a dental practice:

1. They have access to a large pool of associates due to the increasing supply of dentists in the GTA, thus dental manpower is not a serious concern for them.

2. This increasing supply of young, eager dentists is very much to the ID’s advantage because fee-sharing arrangements may be negotiated that are often lower than the traditional compensation agreements of the past.

3. Some owners agree to remain with the office, as the associate of the ID, adding to the security of having a sufficient number of dentists to service patient flow and treatment needs.

4. The ID has a readily available supply of funding which permits purchasing power beyond that of the traditional, younger, solo dentist buyer.

5. The track records of the past few years has bolstered the ID’s confidence — most are reporting increased revenues since the purchase and a resulting increase in net earnings.

6. Some suppliers are offering bulk purchasing rates to their larger customers, which adds to the ID’s net income by reducing supply costs.

7. Patient and staff retention rates have proven to be much higher than first anticipated by most IDs. This has reduced concerns over loss of income due to the changes in both ownership and staffing.

A recent discussion with several IDs revealed an increasing appetite for practice purchases, and most are strongly indicating that they wish to add to their portfolios. As well, there are a number of new candidates who have yet to build a portfolio but who are seriously seeking to buy practices. I predict that this increasing number of IDs is likely to continue for several years, but with some possible restrictions:

1. Lenders could reach a level of ‘comfort’ with some of the less sophisticated and experienced IDs, cautioning them to slow down their planned, rapid growth rate — this may reduce the ID’s buying power.

2. Some dentists may not be willing to sell to an ID, choosing to sell their practices to a hands-on owner, much as they themselves may have done when first starting out. This remains the more traditional and typical sale process of a professional practice.

3. Some IDs may become tired of the challenges of absentee ownership — issues such as associate turnover, staff and practice management come to mind. Another impact of Investor Dentists™ is that they are absorbing a sizeable portion of the available supply of practices. The traditional, younger, solo buyer (one to five years since graduating) who is seeking a practice as a career choice (as well as an investment) often may find him or herself blocked out of the buying process.

The experienced ID can usually analyse and act more rapidly than a first-time buyer. The ID actually creates a larger potential labour pool for his or her business model because there are fewer practices available for purchase. Thus a young dentist may be forced to continue to seek associateships with an ID while continuing to search for a practice to buy. The ID’s buying strategy does have some limits since the business model usually avoids the following:

1. Highly stylized and elaborate offices. The cost to acquire these practices often reduces or eliminates the excess profits the ID is seeking.

2. Practices that are highly influenced by a personal brand (the character and personality of the owner(s) for example). These are more difficult to staff with new dentists and the likelihood of a high patient retention rate is perceived as poor.

3. Dentists who perform a wide spectrum of treatments are not easily replaced. Practice income typically declines if the ID introduces less experienced dentists into these practices.

Would you sell to an Investor Dentist? Would he or she be interested in buying your practice? While every practice is unique, it’s something you may want to investigate before entering the sale process.

Ontario Dentist – April 2008

Market Update

Date Posted: 2008/03/05

Dental practice sales for the first quarter of 2008 will be higher than in the first quarter of 2007. As this market matures, in terms of the average age of a practising dentist, the number (supply) of practices for sale will increase and the demand will eventually decrease. Any change in these two critical variables will have an impact on price.

This topic has been documented by many experts for almost 10 years, but the real increase in supply has yet to materialize. Thus demand remains very strong. In the very unique marketplace of dental practice sales the cycles are somewhat predictable yet have proven to be quite resistant to outside economic forces. When compared with the units of measure for the traditional economy such as the stock market, currency fluctuations, oil prices and real estate, dentistry as a profession remains very stable.

Proof of such resilience is the continuing availability of financing from all the major lenders in Canada.

This lending invariably stimulates the demand for practice acquisitions, expansions and in some areas, a steady stream of brand new start-ups. One would anticipate a marginal withdrawal from the current lending practices of the banks, when studying the more immediate changes to the markets in early January 2008. The TSE dropped dramatically in mid-month, the US has entered the ‘recession’ debate and other global factors continue to cause unrest. However, the dental market place proves to be stronger than ever, with new buyers entering the market daily combined with a continuing short supply of practices for sale in the highest demand areas. Thus, prices continue to increase in the most desirable regions, namely those surrounding the GTA.

How is this possible? Some observations that we share with our clients are:

1. Dentistry has educated the public for many years, thus cementing itself as an essential service and these educated patients continue to appoint regardless of negative economic data — thus, the income of most dental practices is stable or rising.

2. Dentists and dental practice teams are steadily becoming more business-sensitive and are better at addressing consumer demand for elective dental treatments. This is opposed to the more traditional practice of treating immediate needs only, which to a large extent was influenced in previous generations by insurance benefits.

3. Our ageing population needs more health care and it is highly predictable that the elderly demographic will consume an even greater volume of dental care each year. We predict this will be the pattern for at least another 10 to 20 years.

4. The Canadian economy generally remains very stable, and is growing in many regions; consumer confidence thus remains solid. This confidence will continue to stimulate elective spending on many items, including health care (cosmetics).

In short, this continues to be one of the greatest growth periods for dentistry. What a fabulous time to be a dentist, to own a practice or to enter into ownership! Even with the climbing sale prices of those practices in the major markets, the cash flow and the Return on Investment (ROI) mean owning a practice or entering into ownership remains one of the best financial decisions a dentist can possibly make.

Ontario Dentist – March 2008

The Private Sale

Date Posted: 2007/12/14

Occasionally, after we have completed an appraisal, clients tell us that they are going to attempt to sell their dental practice to an associate, or to another colleague. While a broker would prefer to act as an agent, thus earning the usual commission, we do
not insist that our appraisal clients also use our brokerage services. This is known as “tied selling” and my regulator frowns upon it.

What are the benefits of the “private” or “Limited Market Exposure” (LME) sale? Are there any pitfalls?

The first perceived benefit, held by the seller, is that he or she will save the usual and customary commission paid to the broker. Sellers then conclude that this will increase the net proceeds of the sale. While this is entirely possible, informal research on the topic reveals it may not always be the case. The primary reason the net proceeds of a private sale are not as high as anticipated, when compared with a brokered sale, is that buyers are quick to suggest that the lack of a commission should entitle them to a reduced sale price. I asked several leading and reputable bankers, accountants, and lawyers who are active in the dental market what their clients were actually saving when a private sale occurs. The answer may surprise you — most of these market experts readily admit that the sale price was notably lower, when compared with similar ‘brokered sales’ and that the client’s anticipated savings rarely materialize.

Another concern for the private seller is the accidental withholding of valuable information. Buyers are afraid to insult the owner by asking some of the more difficult questions about financial matters or clinical philosophy, but rarely have this same reservation when working with brokers. I have often heard a buyer say, “I wish I had known that before buying this practice” and I reply with, “Why didn’t you ask?” The answer is invariably “I did not want to insult him.” Similarly, sellers who have sold their practice privately, tell me they wish they knew more about the buyer before the sale was completed, but they conclude with a remark such as, “I didn’t want to discourage him, so I never mentioned some of the aspects of my practice.”

For the buyer, the obvious benefit is that he or she does not have to compete with the multitude of other buyers in the marketplace. This affords the buyer more time to investigate and reduces the pressure to increase the offer. One major shortcoming for the buyer is that not all the relevant facts about a practice may be revealed before proceeding, due to the desire to safeguard professional relations. Difficult questions must be asked when buying a practice.

Professional relations are important to dentists, since they genuinely want to trust each other, and in the large majority of sales trust is earned. However, in today’s ever-changing market, generational, gender and ethnic variables are now playing a large role in the buyer and seller interaction process.

I believe that dentists who try to buy a practice privately will undoubtedly offer a lower sale price in the absence of a broker. Further, if a buyer knows that he or she may be the only “option” being explored by the seller, they may secretly feel a distinct advantage — perhaps to the extent of exploiting this at the seller’s expense.

Buyers have remarked they think private sellers are either cheap or naive. Is that how you want to be perceived by the buyer of your practice?

Ontario Dentist – December 2007

Multiple Offers

Date Posted: 2007/11/05

To understand this competition for practices, the most influential issue to consider is the increasing surplus of young, ambitious general dentists in the GTA. During one recent sale, our firm met with 34 dentists — each of whom arrived in person to view the practice — and all on the same day! This was unheard of in the past and only serves to confirm there are large numbers of buyers seeking established practices in the GTA. As a result of this one-day “open house” numerous offers were submitted within the following week, affording the seller the luxury of choice. In the end, only one offer was accepted and the remaining buyers were left to seek other opportunities.

Buyers often ask what steps can they take to improve their chances of being the successful candidate? My first suggestion is that speed is the buyer’s best tactic. The process of deciding what price to offer and working with a lawyer, accountant and banker to structure the offer is also very important. Some buyers wait too long, thus lowering their chances. Much like the housing market, if you see a practice you want, it is imperative to move promptly and with decisive communications to the seller and his or her broker.

Buyers should also know that the market has developed a ‘sealed bid’ process. Only the seller knows the price and terms of the various offers. If a broker informs one buyer of another buyer’s price or terms, he then creates a “Dutch Auction” whereby all buyers are entitled to know the price offered by all the other offers. While the “Dutch Auction” is common in some markets, it is not the preferred technique for selling professional practices. Buyers tell me they do not want others to know what they have offered the seller. Buyers also do not wish to be subjected to an increasing price simply by allowing the seller (or broker) to create this open knowledge auction. Invariably, the price will escalate even higher.

Another strategy for today’s buyer is to carefully examine the tax structure of the sale in advance of submitting the offer. Many sellers are forming professional corporations prior to sale, so that they will benefit from substantial tax savings afforded by the capital gains exemption.

Buyers traditionally were not inclined to buy the shares of corporations, as it does not afford them the same tax advantage as sellers. However, as the market continues to evolve, the incorporated practice is fast becoming the norm and buyers are advised to prepare for the impact of buying such practices. An accountant is the best advisor to consult with on this matter before you commit to submitting an offer. Buyers should also seek advice from their bankers before entering a competition for a practice to ensure they are well prepared for the possibility of a counter-offer (also known as a “signback”) from a seller who is seeking a higher price. In many recent sales, the final selling prices have often been higher than appraised values.

I am empathetic to buyers who are ready, willing and able to take over an established practice only to find that they are being eliminated due to an overwhelming number of competitors. The market must change, as all markets do over time, but I do not foresee the surplus of dentists in the GTA reducing in number anytime soon. Great news for sellers — not so great for buyers.

Ontario Dentist – November 2007

Purchasing a Practice – Top 10 Issues

Date Posted: 2007/10/05

Buying a dental practice is a time-consuming, demanding process for a young professional, mainly because it’s a very complex transaction that forces you to make some difficult decisions. First, it is important to determine your geographic limits. You may, for example, decide you need to be within a 30-minute drive from home because of a desire to be close to family and friends. This limitation has prevented many dentists from relocating and considering thriving practices for sale outside of greater Toronto. The sooner you commit to an area, the more precise your search will be, so it’s best to set your sights on one or two areas. Other questions that must be answered include:

1. How much debt are you prepared to incur? $250,000, $750,000, or more? Many young dentists have student loans, car loans, new families, mortgages, etc., and they don’t want to borrow a large sum of money for a dental practice at this stage in their careers.

2. How many days or hours per week do you want to work? Some practices offer part-time hours that may be more suitable if there are parenting obligations. Others may demand that you work 50 – 60 hours per week plus some evenings and weekends. Think about these issues carefully.

3. What is the scope of treatment you can offer, and what must you refer to another dentist? Do not overestimate your skills too early — problems may arise when inexperienced dentists take on cases that they should have referred out.

4. Do you prefer to work out of one or two operatories? How many hygiene recall appointments can you comfortably accommodate per day? How fast is your dexterity and operative speed? How much full-time experience do you have?

5. Will you be expanding your practice in the future to include other services, dentists or specialists? If your long-term goal is to own a large practice, think well ahead. Relocating is very expensive and has the potential to be a serious disruption to practice
income.

Once you have answered these questions, you can begin your search. Here are 10 key issues to consider:

 
1. Start by phoning several dental practice brokers, let them know you are in the market and express your commitment to thoroughly investigate practices in the city or town you prefer. Many brokers have more buyers than practices for sale.

2.Each practice you consider should have a Professional Appraisal ready for your viewing. Most brokers ask that you sign a confidentiality agreement stating that your personal information, and the data supplied to you about the other dentist, will be protected. This is usually done just prior to viewing the appraisal report, which should include all operational and financial data about the practice. If a proper appraisal is not available (complete appraisals are usually 50 – 75 pages in length) you are entitled to request one, so that you will have the data you require in order to make an informed decision.

3. A professional appraiser does not mind if you take the report to another professional appraiser for a second opinion — as long as he or she is informed. You will likely pay a fee for this service, as the other party will not be involved in the sale.

4. Visit your accountant. This is the most important step and will determine your
ability to manage the practice. Accountants will also prepare a budget for your
personal living expenses and income taxes over and above the office expenses.

5. You’re now ready to view a practice. This is generally done after hours in the majority of cases. Most dentists do not tell their staff the practice is for sale due to the risk of damaging their goodwill. Staff and patients have been known to leave practices when rumors about an owner are started, because people think the owner has personal, health, or financial problems.

6. Verify the information found in any appraisal or report given to you. For example, counting charts in a practice is something you should do, because a chart count will help determine how busy you may be in the future. However, a chart count is a very unreliable way to value the goodwill of a practice. The revenue earned from patients is a far superior indication of value.

7. Brokers usually work for, and are paid by, the seller and accordingly our duty under agency law is to represent only the vendor. This does not mean you participate without representation, so be sure to include your accountant, lawyer and banker. It is uncommon for two different brokers to be involved in the sale of dental practices.

8. Once you have viewed the practice and performed your own verification of charts, appointment books and financial records, it’s time to draft an offer. At this point it is essential to obtain legal advice. Remember that the Agreement of Purchase and Sale document is designed to be fair to both parties and since most brokers want your business in the future, we must treat you fairly. Under agency law you are entitled to full disclosure of all meaningful business facts about the practice you are purchasing.

9. The broker will perform most of the negotiations between both dentists. He or she acts as the intermediary between the lawyers, accountants and the financial institution, if necessary.

10. Be certain you have investigated the entire process before signing the final offer. If you are not sure, walk away. Do not act too fast or bow to pressure by anyone who threatens that you may lose this opportunity. There will be other practices for sale in the future. Do not compromise your career because of a rash decision.

Ontario Dentist – October 2007

How Much is a Patient Worth?

Date Posted: 2007/09/14

A well respected dental consultant recently informed a dental practice purchaser that patient files are each worth $100. However I later learned that the practice in question was located in Mississauga — which is one of the most sought after locations in the entire country. Thus the value of each patient file could be significantly higher. As evidence, a practice in downtown Toronto was recently sold for a goodwill price of $320,000. This practice had to be moved immediately to another location and had only 800 active recall patient files in total — which works out to exactly $400 per patient. Further, there were no hold backs in the offer, no reconciliation formulas based upon patients showing up or income staying the same or even a requirement that the former owner remain for a transition period. It was an unconditional cash sale.

Quite simply — the market knows what something is worth. Supply and demand are the major determinants of what a sale price will be. Look at the stock market. Look at residential real estate sales. When something is over priced (or is in low demand) it sits around unsold for a long time. When it is under priced (or is highly coveted) it sells in an instant. The conclusion is that when there are already too many dentists serving a community, and more wanting to enter, and not enough patients to go around, the value of each patient file will be higher. Fair market value is described as the estimated price at which an asset or service would pass from a willing seller to a willing buyer, assuming that both buyer and seller are acting rationally, at arms length, in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. It is also presumed that the price is not affected by special or creative financing or sales concessions granted by anyone associated with the sale.

Although the previous simplistic calculation determined a value of $400 per patient, there are many variables that may alter this number either up or down. I submit that a similar “per patient value” should hold true for all major cites that have a surplus of dentists — as there are few major market differences (with some exceptions) between provinces. In addition to all of the GTA, Vancouver, Calgary, Edmonton, Ottawa and to some extent even areas of Halifax, are very similar in terms of the supply and demand of dental manpower. This opinion is substantiated by the actions of buyers and sellers across Canada.

As further evidence supporting market-based valuations one only has to look to the actions of all five major banks (especially Scotiabank and RBC) who may offer financing to a creditworthy dentist, anywhere in Canada, often based upon an accurate practice appraisal. The banks have confidence in market-based values because they have confidence in dentists. They know that most new dental practice owners can service their debts and pay themselves at the same time.

What is a patient really worth from an investment perspective? If a patient is booked just twice for a cleaning and once for one mediumsized restoration, the dentist will probably bill about $500 for the year. Over 10 years this patient would generate about $5,000 in gross fees. Thus, from an income related to investment approach, if the purchaser paid $400 for the chart, this works out to an 8.7% return on investment. Plus the dentist still owns the chart after ten years and could probably sell it for $400 — all other things remaining equal.

As further evidence for the everincreasing value of dental practices (and ultimately for patient files) an Investor Dentist (i-dentist™) client wants to purchase several dental practices and then place as many associates as possible into these offices, while not planning not to work in any himself. Why? Because a 10-20 percent return can be readily achieved just through managing these offices. When this investor repays all acquisition loans, the return increases to almost 30 percent!

Prior to 1974, when my father Roy Brown first suggested that a dental practice had any value at all, most dentists simply shut their doors and retired. Today, with practice values at an all-time high, we stand by our commitment to owner dentists; those who have dedicated years to establishing their practices. These practitioners deserve to be respected by today’s young purchasers.

Ontario Dentist – September 2007

Hidden Value

Date Posted: 2007/07/30

In a recent issue of Ontario Dentist, (“The New Patient Obsession”, January/February 2007) we discussed the buyer’s concerns about new patient numbers when purchasing an existing practice. A similar logic – being short-sighted – holds true for office equipment, layout, aesthetics and overall visual appeal. Our client, the selling dentist, typically falls into one of three categories:

1. The first decided to set up practice soon after graduation, possibly 30 to 50 years ago. He or she equipped and outfitted their premises when dental office sizes, styles and needs were much different than today. In most cases, other than some minor cosmetic upgrades such as new paint and carpeting, the facility looks pretty much as it did way back then.

2. The second has a mismatch of both old and new equipment as some outdated technologies were replaced on a random, year-to-year basis without a master plan. The hygiene rooms often contain the older dental units, while the dentists’ operatories are the only rooms that have been upgraded. Neither of the first two offices may have much to offer in the way of modern appeal, especially when none of the colours match!

3. The third category, and definitely the smallest group of clients we serve, includes those who are attracted to the newest and sleekest equipment, and have an additional penchant for high-tech gear. These offices are often state of the art.

We appraise equipment and leaseholds at the present fair market value using the “equipment in profitable use” method. This means that if you are using a dental chair to generate revenue on an ongoing basis, then this chair has a higher dollar value than if it was sitting in storage, unused. Even though it may be an older chair, it still works, it’s well-maintained and it generates income.

Most appraisers will provide both the current fair market and the current replacement values of the equipment and leaseholds. This provides the buyer with an idea of the cost (in terms of insurance proceeds) to outfit the office to a “brand-new” condition in the event of fire or total loss.

The purchasers we speak with often agonize about the additional expense they may
incur to completely modernize the office. They comment about shutting the office down, and losing revenue to re-equip or renovate.

In many instances, they have lost sight of the greatest asset of the practice — the patients. This group of loyal patients has attended the practice, regularly, for many years. It is highly probable that most will continue to attend the practice, regardless of whether it is modernized or not. These patients rarely complain about the older décor, or the unsightly chair in one of the operatories. They chose to attend the practice because of many reasons, including the staff, the friendly welcome they receive when they arrive, and yes, even the ambiance.

Patients find comfort in the many “trophies” of the dental environment. In an article in Ontario Dentist several years ago, (“Trophy Marketing,” September 1998) Ann described dental offices that have old family and pet photos on the wall, outdated magazines in the waiting room, a display of the owner’s fishing or curling awards or many other things that make a practice unique, given the owner’s personal style. Try to identify this element of the practice you are buying and make certain it matches your particular style.

The best advice we can give buyers is this: don’t make any changes that are not absolutely necessary in the first year after the sale. Go ahead and purchase new software, an intraoral camera and transmit dental claims via EDI. Try not to shock or intimidate your patients, and make your changes gradually. The patients want the opportunity to meet and develop trust in you and they need time to make this adjustment. You also need some time to adapt to the new challenges of running your own practice.

When purchasing an older practice, look for the real hidden value: the staff, systems, and most important — the loyal patients!

Co-Authored by Ann Wright, RDH, MBA

Ontario Dentist – July/August 2007