The issue of determining active patient charts remains a contentious one in the dental industry. Even with the aid of the various experts and industry advisors, it remains a nuisance to the sale and conveyance of professional practices—and often muddies sales’ waters.
The experts need to debate, discuss and collaborate on this issue—one that has great impact on the due diligence process. Even with all the dental publications and social media outlets that now reach dentists, it doesn’t hurt to restate the message.
So, as one such expert, I weigh in here: Chart count does not equate to goodwill value—it only points to the busyness of the present owner and to his/her chosen style of patient management.
For example, a patient who appoints once a year for a regular cleaning may not be considered active if a buyer only uses the last 12 months as the definition of an active patient.
Should a conservative vendor’s practice be downgraded for using a 12-month standard?
Just this one factor alone shows how some buyers are using a misleading methodology to examine charts. And it doesn’t even matter how this measurement originated because it’s patently flawed.
In addition, standard deviations—the weighting of types of patients as insured versus un-insured or by ethnicity and age profile—are not being reliably analyzed to determine chart count. Cultural differences are often bantered about like it’s common acceptance to classify certain patients as frugal or cost-conscious. This is an insult to both clients and their patients.
When my firm surveys buyers to examine post-purchase results (one-year later), most buyers report a higher gross income in their first year than in the last year of the previous owner. Almost 40 years of surveys prove that an increase of 5–15% is common.
Why is this?
Buyers report the discovery of ample untreated, elective cases that the previous owner chose not to treat or refer out to specialists. This may be due to the previous owner’s age, his/her late-career motivation or general fatigue leading to a simple lack of desire for busy day-sheets.
Others may simply lack the skill or technology to perform the treatments. Knowing this, why are buyers fixated on the chart count and not the 10-year vision that most owners use to succeed?
Every owner-dentist relates that he/ she retrieves what are considered in-active patient files with regularity as people move back into old neighbourhoods, regain employment and insurance coverage or simply realize that they need to see their dentist/hygienist again after an absence of mind or resources.
Some industry advisors resist the above points. I advise clients to accept offers from mature, well-informed and ambitious buyers. I have even considered asking some buyers to do their own due diligence (with the incurred time and money cost) before an offer, to compare with my separate findings—even if this means another offer is accepted and the potential purchase is lost.
I know that both buyers and sellers get frustrated and complain about costs (legal etc.) when a transaction does not come to speedy fruition. To avoid this, the answer is simple: a reliable industry standard of dental practice valuation.
Empirical appraisal (my firm’s methodology stems from over 7,500 practices appraised since 1974) places little, if any value on chart count. Far more important is a practice’s historical, armslength, open-market sales data—supported by the income approach (cash flow)—to determine fair market value.
Based on all this, the tactic of negotiating sale price after an accepted offer—by using a buyer’s chart count methodology—is found wanting.
Despite having written extensively on this topic before, I’m always open to input. The dental practice is an ever-changing business model. Practices and methods must adapt.
Let the debate begin! If it leads to an industry-wide and recognized valuation standard, we’ll all benefit.