March 12, 2019
What am I selling when I sell my practice?
In a previous blog, Katie Collins considered the notion of a “fair price” when selling a dental practice. But a deeper dive into the selling price reveals specifically what is being sold to the practice buyer. What are the components of a practice? Let’s identify and explore them.
The most obvious practice component sold is dental supplies, equipment, furniture and fixtures. These are called tangible assets — things we can see and touch. Tangible assets include dental chairs, digital x-ray systems, computers and computer servers, waiting room furniture, office desks and common dental supplies. Not surprisingly, the value of tangible assets is typically the easiest to determine. It is important to note that the practice purchase does not include the practice real estate, office building and, in some cases, leasehold improvements. The practice purchase also does not include the cost of an office lease. These items are separately negotiated and sold.
This practice component is more difficult to describe but the value of which is easily understood. This intangible asset is described as “goodwill” and consists of a number of elements.
- Patients — All of us have a bond with our physician and dentist. This bond prompts us to return to them again and again. It may be the competence of the doctor, the friendliness of the staff or the convenience of the location — but whatever it is, that bond creates value for you in the form of continuing fees and the prospect of future fees.
- Location — Location is important to patients. It may represent convenience in terms of distance or proximity to other services, like shopping or entertainment. However, the value of location also relates to the attractiveness of your practice to future patients. A location in a growing or established community tends to have greater value than a location in a community in economic decline.
- Referral Network — This is a value particularly related to dental specialties, like endodontics, orthodontics, sleep apnea and cosmetic dentistry. It represents the medical and professional network of providers that refer their patients to specialists for a specific need (such as a root canal).
In nearly all practice sales, the seller signs an agreement not to compete (practice dentistry) within a specified geographic area surrounding the practice. The seller also agrees not to contact or offer services to current patients. While there is a value assigned to this agreement, the true value of this agreement is to the buyer. However, all sellers who enter into these agreements will see a portion of the practice sales price allocated to this asset.
Assets Not Conveyed in a Practice Sale
You may be surprised to learn that some practice assets are not included in the practice valuation. These include practice cash and patient receivables. You, as the selling dentist, can elect to keep these assets or sell them to the buyer as an add-on to the selling price. Of course, the buyer may take issue with the value of patient receivables — and for good reason! For a patient who has not paid you for services received over a year ago, it is quite possible you will never collect these funds. It is best practice to review the collectability of patient receivables at least once a month. As you prepare to sell your practice, it is an especially important step to “clean up” patient receivables.
This commentary originally appeared March 11 on DentalTown.com
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