Recently I completed my Certified Exit Planning Advisor designation. This was an important value-add I wanted to bring to my clients in dentistry. We’ve got lots of appraisers, lots of brokers, and lots of consultants out there. What Canadian dentistry is lacking is tactical execution of value improvement methodology.
In, At, & Beyond
There are three ways to look at your practice. We can look IN the business. This is where nearly every dentist spends their day-to-day. Inside the business is where our day-to-day operations exist, patient and team connections happen, and revenue is generated. Secondly, we can look AT the business from the outside. This is where value gets its spotlight. Most owners see this as a “moment” where value is stated or determined. But this is actually a process where we can create improvements. Thirdly, we can look BEYOND the business. Looking beyond the business is exit planning. This is where we take your vision and your business and strategically build out how value can be maximized with the intentions you have for your future.
External factors of value:
As dentists we like control, and we’re used to it. When things happen out of our control, we usually come home from work a little miserable. It’s part of our DNA and part of what makes us good at what we do. Dental practice value is a function of both external and internal factors. External factors are those beyond our control These are things like the marketplace & the economy: How many buyers are out there that want what you have (demand and the marketplace)? What are the economic realities of practice acquisition (Cash earnings after financing of 100% at 12 years and prime less 0.25).
External factors determine the RANGE of EBITDA for practices in the Canadian marketplace.
Internal factors of value:
Within that range of EBITDA, you have control. You have a major influence in your practice within the set range of industry standards from extremely conservative ranging to best in class. These internal factors can be thought of as four levers, which I call “The 4 P’s”.
The Four P’s:
The Four P’s of internal factors of value are:
- Profit – Profit includes your practice’s overhead, accounts receivable, the seller discretionary earnings (“SDE”) if you’re a hands-on owner practice or EBITDA if you’ve got significant earnings beyond your own remuneration in the practice. This gives us a sense of the kind of practice you operate and whether or not you’ll be selling the practice as a “job” or a “business”
- Patients – High level patient data that gives profound insight to value include annual revenue per patient, total active patient count, attrition vs. growth, and hygiene production.
- People – The People factor reflects your practice culture, synergy, and team dynamics. But it’s more than subjective. It also reflects how your production is affected by these qualities. Are the right people in the right positions? Is there consistency amongst your team in terms of reliability (and even availability with today’s hiring challenges)? And is the production of the office highly dependent on certain individuals (like you or your office manager that promises she will retire when you do)?
- Premises – The lease is a major influencer of value, as you already know. Beyond that, the capacity for increasing revenue with expansion of the existing footprint is also a significant contributor.
EBITDA multiples climb because of two factors:
- The EBITDA value itself. Higher EBITDA = higher multiples in the range of possibility.
- The readiness and attractiveness of the business = This comes down to the FOUR P’s.
Most dentists aren’t concerned with any of this because they are busy working in their business. But a practice that operates at a multiple of 5 x EBITDA and sees a profit of $250,000 might be worth $1,250,000. Pulling a few levers without overhauling anything to see that EBITDA go up to $275,000 and improving ONE or TWO areas of the four P’s, could theoretically see that EBITDA multiple increased to a 6. The bottom line impact of that could be almost half a million dollars of value in your pocket (or two years of earnings in this example).
PA is introducing a program using our CoPilot framework where we work with you on practice value enhancement. It starts with a “quick and dirty” assessment of your practice’s internal factors. This requires very little from you and gives you an estimate of value. We then work with you to show you where opportunity exists for your net worth to be enhanced. YOU decide what levers you feel like pulling, and we are there to CoPilot the implementation. This can be a three month project, six month project, or ongoing project. The idea here is that we want to look at the low lying fruit that is simple, easy, and meaningful for your practice’s value. And nothing obliges you to work with us in a future sale.
You’ll gain more insight on your practice, feel more in control of your business’ attractiveness and readiness, and see your practice as not only an income generator but as a stock in your portfolio. We’ll even meet with your advisory team to make sure they understand your business’ value for your future financial planning if that’s something you want from us.
There’s value in the walls of what you’ve built. Accessing it requires action. We’re ready to unlock that when you are.
