Fees and Practice Value in a Dental Practice Transition

By Brannon Moncrief and David McLerran of McLerran & Associates

Many dentists claim they don’t have time to apply sufficient attention to business matters such as overhead expenses, supplies, and a marketing plan even before a dental practice transition occurs. Others just admit that they have a hard time getting motivated to give business matters the attention needed. The fact remains, dentists should do everything in their power to make time to maintain the business side of the practice especially if they want to sell a dental practice in the future.

Every day, dentists all over the country will call their accountants or other advisers and say, “I feel I’m not doing well.” When these same dentists are subsequently asked about the status of their practice’s production, collections, overhead, new patient visits, total patient visits, and recall activity, the response most often given is, “I don’t know.” Not knowing the numbers leads to feelings of helplessness and frustration. It will ultimately result in dental practice owners making uninformed decisions based on subjective judgment.

Taking X-rays of a patient’s mouth in order to carefully identify problems and craft the most effective treatment plan is fundamental to the practice of clinical dentistry. No less should be done in the identification and development of the most effective means of solving business problems.

Whether it’s a clinical or business situation, diagnosing the problem and planning possible future courses of action is, in and of itself, a comforting exercise. The equivalent diagnostic tool of an X-ray in the business setting is the practice’s numbers. A good handle on the numbers and what they indicate allow one to take the most effective business steps in matters of staffing, facility enlargement, moving the practice, adding an associate or selling a dental practice.

Despite the obviously positive implications for practice profitability and value, many dentists are reluctant to raise fees in the years leading up to the sale of their dental practice. Most of these prospective sellers are winding down their careers, and thus believe themselves to be financially sound, and are reluctant to “burden” their patients with fee increases. However, a dentist who has not raised fees for 36 months passes on a need for a 9% fee increase if the buyer is to make up ground lost to inflation alone.

“Who cares what the former owner did or didn’t do with the fee levels of the practice? The buyer can fix that problem!” Unfortunately, it’s not that simple. Even in instances where buyers increase fees as a necessary act to cover ground lost by the seller to inflation, the mere act of increasing fees is often viewed by the patients and staff of the practice as a negative act rather than the appropriate adjustment to market. As a result, buyers will rarely purchase a dental practice with fee increases as a key element of their dental transition plan. Rather, they will make a discounted offer for the practice such that the fee structure in place is justified, by the price paid for the practice. In other words, dentists who have been reluctant to keep the level of their fees in line with the quality and method of their approach to dental care delivery, and in line with inflationary increases, end up paying for this lack of vigilance twice — once in the reduced practice income while they operated it, and the second time in the form of the reduced price for which the dental practice is sold.

Dental practices netting 40% or more before compensation for professional dental services are in the highest demand. These practices are most likely to ensure compensation of 28% to 30% for the doctor and leave 13% to 15% for debt service and capital improvements. Very often practices put up for sale net less than 40% because their fees are below market for their area. Most buyers are not interested in purchasing a seller’s problems. Therefore, sellers need to correct over-staffing, as well as staff compensation and fee schedule problems before they sell a dental practice. The alternative, as previously noted, is for sellers to accept significantly discounted values for their practices.

Some sellers think that patients will leave if fees are increased. In fact, less than 10% of patients will even notice a fee increase from $650 to $710. The same fee increase made by the seller will result in less than 1% of the patients making an issue of the increase, while the same very reasonable and appropriate change made by the buyer typically creates a real sense of outrage and confusion for a majority of both the staff and patients of the practice.