04 Jan UNDERSTANDING PRACTICE VALUE

We are often asked by doctors who are anticipating selling their practice in the next few years what changes can be implemented that will cause their practice to be more valuable. Typically these doctors are thinking of such expensive investments as upgrading their equipment, adding new equipment such as lasers or a CEREC, or perhaps even renovating or adding on to their existing facility.

While sprucing up your office and your equipment may attract a few buyers, such expenditures really do very little, if anything at all, to increase your practice’s fair market value or its marketability. In fact, these expenditures ultimately just result in a cost that simply can’t be recovered when your practice is sold!

The number one asset you own and the number one asset that all buyers seek is your patient base. While it is definitely true that virtually all buyers desire a great facility and the latest and greatest equipment, without a patient base the former have virtually no value at all. At least 90% of the market value of your practice is associated with your patient base and the financial impact these patients represent.

The market value difference between an office with new equipment and an office with 20-year-old equipment is a mere 2% to 5%. For example, if your practice is worth $500,000 with older equipment, it may be worth $510,000 to $525,000 with brand new equipment. Even assuming your practice would value on the high side, investing $150,000 to modernize your equipment in order to receive an additional $25,000 in practice value makes absolutely no sense at all.

To fully understand the impact of the patient base on practice market value, let’s assume we have two practices, side by side. Practice A is a managed care facility with patient plans that pay about 60% of the normal fee schedule. The practice produces $500,000 annually on a 5-day workweek, brand new equipment and a modern facility. Practice B is a fee-for-service practice and since the patients pay full fees is only open 3.5 days a week to produce the same $500,000 that Practice A produces annually. Practice B has adequate, but older equipment, and an adequate facility. Each practice shows a net profit of $200,000 a year. Which practice is more valuable? Practice B is considerably more valuable… probably as much as a 50% higher fair market value! Why? Because of the patient base. The high quality, fee-for-service patient base is what every purchaser seeks in a practice opportunity!

If you really want to enhance the market value of your practice, first start by asking PARAGON to analyze your practice so you will know exactly where your specific market value enhancement areas are located.

Also, consider the following:

• Start preparing monthly profit and loss statements. If you own multiple practices, separate income and expense reporting for each practice.
• Implement simple, effective practice monitoring systems. Track your monthly doctor and hygiene production. Track your monthly collections and accounts receivable. Know the number of new patients you receive each month as well as the source of the patient referrals. If you subscribe to any plans for patient referrals, know the split between managed care and fee-for-service, by plan.
• Know exactly how many active patient charts you have (patients treated in the last 24 months). Know how many of these patients are fee-for-service (FFS) and how many are plan patients. If you are on any PPO plans, know what percentage each plan pays of your normal fee schedule. FYI: patients from a PPO that pays 90% or greater of your normal fees are considered FFS patients for practice market valuation purposes.
• Improve your hygiene recall effectiveness by reviewing each active patient chart. The more profitable your hygiene department, the more valuable your practice!
• Track the treatment you diagnose. For example, proving that you have $400,000 of diagnosed, but yet uncompleted dentistry (“work in progress”), makes your practice more valuable!
• Know your treatment history. How many times did you do sealants, amalgams, composites or crowns last month, last year? How often did you refer endo, perio, or oral surgery last month, last year? This process can help to adjust your behavior to better serve the patients as well as demonstrate where a potential buyer of your practice can improve his/her services and income.

Practice value is largely a matter of perception and you can do a number of subtle, inexpensive things to improve that perception. Call PARAGON today… we will show you how to get the maximum value for your practice when you decide it is time to sell.