Your actual true profit (cash flow) of your dental practice is only one of many factors determining the value of your practice, but it is the single most important factor in determining whether or not your practice sells outside of location.
Your practice’s asking price will rise with its true profit. Many dental practices need to improve their true profit just to be able to sell their practices at all. Contrary to popular belief, your true profit is not the bottom line of your business’ tax return. Here are three examples.
Example one:
In this example, Practice A’s true profit is only 30% compared to Practice B’s true profit of 40% ($50,000 more per year). A buyer could buy Practice A and make $110,000 annually or purchase Practice B and make $160,000 annually after paying their bank loan. With all things being equal, an educated buyer would choose Practice B.
Example two:
In this example, Practice C’s true profit is only 30% compared to Practice D’s true profit of 40% ($100,000 more per year). An individual buyer could buy Practice C and make $220,000 annually or Practice D and make $320,000 annually after paying their bank loan. The buyer of Practice D will make $100,000 more every year. Again, with all other things being equal, the buyer would pick Practice D.
Example three:
Now, let’s assume that the seller is entertaining offers from Corporate Buyers:
This is the same data except that in this case, assume the Corporate Buyer is willing to pay 5 X EBITDA for a practice. Practice C would sell for $450,000 while Practice D would sell for $950,000. A $500,000 dollar price difference all because of a 10% difference in the profit margin!
Your “bottom line” is most significant just before your practice sale. If you would like us to do an assessment of your practice’s financial situation, please give us a call.
