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Measuring Practice Value


by Earl M. Douglas, DDS, MBA, BVAL

In my last column we discussed the concepts of price and value. We defined price as the consideration (cash, note, barter, etc.) paid to acquire an asset and value as the benefit (cash flow, enjoyment, etc.) received by the buyer of the asset.


The importance of value to the buyer of a dental practice is emphasized, since value is the buyer's actual take-home income. Our objective now is to learn how to recognize and measure value in practices.



To this end, let's examine two actual practices.

Table 1 Practice A Practice B
Gross collections
$654,643 $472,803
Practice price
$425,000 $289,000
Price as a percent of gross
65% 61%
Buyer net income after all expenses and debt service $121,910 $129,353
Buyer net as percentage of gross collections 19% 27%

Most buyers would agree that Practice B is more desirable because the price is lower, the net income is higher, the price is a lower percentage of gross, and the percentage net is higher. Before deciding though, let's look at these two practices more closely.

Table 2 Practice A Practice B
Hygiene collection
$170,879 $104,017
Seller (as post-sale associate to buyer) $363,327 $0
Buyer produced collections
$120,437 $368,786
Buyer net income after all expenses and debt service $121,910 $129,353
Buyer net as a percentage of personal production 101% 35%

We have just introduced an important new statistic - buyer net as a percentage of personal production. This percentage, along with the net income dollar amount, is the most important measure of practice value.


Buyers who overlook this essential statistic will likely prefer Practice B. Buyers examining this statistic will likely prefer Practice A with a 101% net as a percentage of personal production compared to 35% for Practice B.


Additionally, Practice A's first year accrued equity of $74,692 plus the buyer's income of $121,910 yields a total benefit of $196,602 or 163% of personal production. Practice B's comparable first year equity of $51,105 and buyer's income of $129,353 yields a total benefit of $180,458, which is 49% of personal production. Simply put, Practice B's buyer will earn only one-third the value (income and equity) for a given amount of production as will Practice A's buyer.


One reason for these differences is practice overhead efficiency. Practice A's three-year average adjusted overhead expenses are 43% of gross compared to 54% for Practice B. Practice A's 11% higher efficiency results in a $72,000 higher net income for its owner compared to an equal amount of work produced in Practice B.


The most impactful difference, however, is due to surplus earnings from income generated by hygienists and the seller working as a post-sale associate. Practice A's income from these sources is $534,206. After paying seller and hygienist salaries of $198,116, Practice A has surplus earnings of $336,090 which pays the annual debt service of $116,263, with an additional $219,827 to apply to expenses. Practice B's hygiene collections of $104,017, less hygiene salaries of $46,140, leaves surplus earnings of $57,877, which covers 73% of the $79,549 debt service with nothing left over for overhead.


The dramatic contrast of these actual practice opportunities underscores the importance of understanding and applying the statistic of buyer net as a percentage of personal production to measure practice value - an essential understanding for making well-informed practice purchase decisions.


Testimonial from a Satistfied Dentist

"I am Dr. Roger Bermingham, and I purchased my dental practice 28 years ago through Dr. Earl Douglas of ADS South, LLC. The experience then was so comfortable and easy that when I decided to sell my practice and retire, I could think of no one better to handle the sale than Dr. Douglas. Dr. Douglas handled the transaction from start to finish and it could not have been a more pleasant and professional experience. He identified a qualified purchaser within weeks of listing my practice and made what could have been a stressful process very easy which is a tribute to his many years of doing what he does so well. I’ll always be grateful to him for that and would recommend him to any dentist who would want to sell their practice."

Roger B. - Roswell, Georgia

Back to Articles

Measuring Practice Value


by Earl M. Douglas, DDS, MBA, BVAL

In my last column we discussed the concepts of price and value. We defined price as the consideration (cash, note, barter, etc.) paid to acquire an asset and value as the benefit (cash flow, enjoyment, etc.) received by the buyer of the asset.


The importance of value to the buyer of a dental practice is emphasized, since value is the buyer's actual take-home income. Our objective now is to learn how to recognize and measure value in practices.



To this end, let's examine two actual practices.

Table 1 Practice A Practice B
Gross collections
$654,643 $472,803
Practice price
$425,000 $289,000
Price as a percent of gross
65% 61%
Buyer net income after all expenses and debt service $121,910 $129,353
Buyer net as percentage of gross collections 19% 27%

Most buyers would agree that Practice B is more desirable because the price is lower, the net income is higher, the price is a lower percentage of gross, and the percentage net is higher. Before deciding though, let's look at these two practices more closely.

Table 2 Practice A Practice B
Hygiene collection
$170,879 $104,017
Seller (as post-sale associate to buyer) $363,327 $0
Buyer produced collections
$120,437 $368,786
Buyer net income after all expenses and debt service $121,910 $129,353
Buyer net as a percentage of personal production 101% 35%

We have just introduced an important new statistic - buyer net as a percentage of personal production. This percentage, along with the net income dollar amount, is the most important measure of practice value.


Buyers who overlook this essential statistic will likely prefer Practice B. Buyers examining this statistic will likely prefer Practice A with a 101% net as a percentage of personal production compared to 35% for Practice B.


Additionally, Practice A's first year accrued equity of $74,692 plus the buyer's income of $121,910 yields a total benefit of $196,602 or 163% of personal production. Practice B's comparable first year equity of $51,105 and buyer's income of $129,353 yields a total benefit of $180,458, which is 49% of personal production. Simply put, Practice B's buyer will earn only one-third the value (income and equity) for a given amount of production as will Practice A's buyer.


One reason for these differences is practice overhead efficiency. Practice A's three-year average adjusted overhead expenses are 43% of gross compared to 54% for Practice B. Practice A's 11% higher efficiency results in a $72,000 higher net income for its owner compared to an equal amount of work produced in Practice B.


The most impactful difference, however, is due to surplus earnings from income generated by hygienists and the seller working as a post-sale associate. Practice A's income from these sources is $534,206. After paying seller and hygienist salaries of $198,116, Practice A has surplus earnings of $336,090 which pays the annual debt service of $116,263, with an additional $219,827 to apply to expenses. Practice B's hygiene collections of $104,017, less hygiene salaries of $46,140, leaves surplus earnings of $57,877, which covers 73% of the $79,549 debt service with nothing left over for overhead.


The dramatic contrast of these actual practice opportunities underscores the importance of understanding and applying the statistic of buyer net as a percentage of personal production to measure practice value - an essential understanding for making well-informed practice purchase decisions.


ADS South

Testimonial from a Satistfied Dentist

"I have worked with other practice brokers before and, believe me, there is no comparison! You and your staff made what could have been a stressful and complex event a walk in the park. Your professionalism and attention to detail were not only refreshing, but were integral to the success of my recent practice purchase. I must also commend you on your network of associates who greatly simplified everything from purchasing insurance to obtaining financing. I can only say that I would heartily encourage any dentist who is considering a practice purchase to use the services you provide."

Todd Afferica, DDS