February 21, 2019
Selling a practice: What is a fair price?
The time has come. You’ve spoken to your wealth advisor, and they are confident you have reached financial freedom. You’ve talked with your spouse/partner, and they’re ready for the next phase. And most importantly, you’re ready. Emotionally and financially, you’re ready. It’s time to list your practice.
Where do you even start? You may talk with a practice broker about listing your practice. You may have an associate who’s ready to take the reins. Your son or daughter may be the next owner. Whoever is lined up to buy your practice will begin asking you, “What’s the price?” And you might be left scratching your head, wondering how to answer this.
A practice appraisal can be a good place to start. This will be part of the ”package” when you work with a broker. But you can also go out on your own and find a consultant who will prepare a practice valuation for you. A practice valuation typically costs anywhere from $3,000 to $5,000. We don’t usually recommend paying for one until you are ready to list your practice. The appraiser will collect a lot of information from you about your practice — 3+ years of production numbers, tax returns, number of patients seen in the past 18 months, procedures you do, etc. They will come in and look around your office space. How many operatories do you have? What sort of equipment do you have? Is it current or outdated? They will review all this information and most likely value your practice using three measurements — a market value, an income value and an asset value. They will then average the three values, and that would be the price of your practice.
We have found over the years (and think it’s still true) that the purchase price of a practice works out to be approximately 65 percent to 80 percent of collections. Those parameters should give you comfort if your practice appraisal comes back within that range. Some of the advice we’ve received from various practice brokers is that the practice purchase is not negotiable. You’ve paid a third party to appraise your practice, and that is the selling price. If negotiations need to take place, there are other parts of the deal that can be negotiated, such as a work back period, closing date or perhaps the lease (if you own your building).
Selling a practice is emotional. You’ve most likely treated kids who have become adults, and now their kids are coming to see you. You’ve had staff members with you your whole career. You have a staff member who says he or she is retiring when you do. You’ve been a staple of the community for over 30 years. You can’t put a price tag on that. You can’t put a price tag on what the practice has allowed you to achieve financially over the past 30 years. You’ve already received most of the value from the practice. The purchase price is simply a means to transition your practice to the next owner.
This commentary originally appeared February 20 on DentalTown.com
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