The concept of the quarterly practice appraisal that every dentist should know

By Dr. Anthony Stefanou, DrBicuspid.com contributing writer

June 23, 2020 -- In our most recent survey at Connect the Dents, 88% of dental practice owners said they are relying on the proceeds of the eventual sale of their practice for retirement. This result is, unsurprisingly, the highest number we have seen since we began asking that question almost 20 years ago.

Let's analyze this. Dentists are always accused of being "bad businesspeople" (that's because we didn't go to school for business -- duh!). Yet, interestingly, 99% of dental practices are profitable. That's not bad, huh? That success rate is why there are still many banks and lenders who are happy to finance practice sales. One can certainly argue that practices should be more profitable and operate at lower overhead. While that is probably true, that's why we have many consultants in the industry -- and a topic for another time.

As small business owners, it may be a good idea (and perfect timing) to think about a concept that is sensible and adhered to by corporations but rarely, if ever, considered by dental practice owners.

The importance of quarterly numbers

Corporations often get criticized for worrying too much about their quarterly numbers. OK, fair enough; but if you really think about it, shouldn't they know what is happening now? How else can they prepare and strategize for continual growth and increasing the value of their company? Should they assume they know how they are doing? How dangerous, lazy, and downright irresponsible would that be?

I'm often amazed when a colleague comes to us seeking guidance when he or she is thinking about selling a practice. These colleagues often initially resist the minimal investment needed to get an objective appraisal because they claim they know what their practice is worth (based on what someone told them the "going percentage of collections is in their ZIP code and/or on what their practice history of collections was five years ago"). To be honest and fair, most do then recognize why it is important to get the formal appraisal done at that point and move forward with it. However, we often find that the result of that appraisal surprises them as the number comes in significantly below or above what they thought. Yes, in some cases, this means two, five, or even 10 or more points lower or higher than they were thinking, which can mean tens of thousands or even hundreds of thousands of dollars. The point is they are just then finding out where they stand when that determination is the crucial factor for their financial future.

Here are some things to think about:

  • Less than 1% of practice owners get formal fair market value (FMV) appraisals done on a regular basis.
  • Most practice owners believe appraisals should only be done when they are ready to sell and retire.
  • 20% of U.S. practices are now affiliated with dental service organizations (DSOs)/groups. This means tens of thousands of dentists have sold (many because they are tired of administrating but still want to do dentistry and practice for many years). They sell in their 30s, 40s, or 50s, at peak practice value, not in their 60s or 70s when ready to retire and the practice is often at its lowest value.

Time to change

It's time to change the thinking. Having an appraisal done is not just for when it's time to sell or retire (although if you are, you certainly will want to do so). Appraisals are probably more valuable, and make total business sense, when you are still building and are at or approaching peak value.

How else will you know when you are reaching peak value? How else will you know what to work on to keep increasing what your practice is worth? How else do you know where you stand now, if not for being able to see and track how you are progressing?

It is time for dental practice owners to strongly consider the quarterly appraisal. There's a reason smart and successful corporations and business owners rely on their quarterly numbers. Otherwise, we are working "blindly" year to year, thinking, hoping, or assuming our practices are or will be worth "x" dollars. Then, when we are ready to sell, we become shellshocked when we see the reality (even if it's higher than we thought).

If 88% of us are counting on the sale for retirement, doesn't it make sense to be able to know where we stand along the way? Let's look at some "real life" examples.

Real estate

Owning a home or property is an investment. You buy a home to eventually sell it at a profit or bequeath it to a family member who will be receiving an asset that then grows in value. Many real estate experts agree that it makes sense to get a regular appraisal done. Upon researching this, here's what one wrote: "The best reason to get your property appraised regularly is how swiftly market prices can move. So, while you might think you have a solid idea of your home price, without an up-to-date appraisal you may, in fact, be underestimating its true worth."

Your individual retirement account (IRA) or stock portfolio

I don't know many people who put their money into a retirement plan or invest in stocks and never look at how they are doing until they sell. Who does that? In fact, some look at it every day. Most of us agree that we (at least periodically) should look at whether our investments are going up or down. I don't know anyone who thinks, "OK, I'm 60 and going to withdraw from my IRA. Fingers crossed, so let's see what we have."

How beneficial would it be to be able to see something like this?

  • 2018 end of year: FMV is $800,000
  • 2019 1st quarter: FMV is $750,000 (-6% from end 2018)
  • 2019 2nd quarter: FMV is $775,000 (+3% from Q1)
  • 2019 3rd quarter: FMV is $825,000 (+6% from Q2, +3% from end 2018)

You can't determine FMV just by looking at a tax return and/or just slapping a percentage of collections to it. An adjusted cash flow analysis and other considerations are needed to determine a grounded practice value. It's not difficult to do, but it should be done by an independent, third-party, objective source, as they would determine the adjusted cash flow (EBITDA) number and then know the "current" market multiple to apply to it.

Even if you are a few years from even thinking about selling, receiving and regularly tracking your FMV on a quarterly basis is extremely valuable. It can help you decide when might be a good time to sell and also show you what to work on to get your FMV up.

For example, an appraisal report can show you that your current overhead should be decreased because your supply costs have gone up significantly, which is hurting cash flow and the overall FMV. It can also show you that your hygiene department, in terms of percentage of overall collections or the overall number itself, has decreased since the third quarter of 2019. Your quarterly appraisal report can also allow you to then determine who might be a good consultant to work with to specifically address those areas. As a side note, approximately 13% of general dental practices currently work with a practice management consultant, and many dentists aren't able to say what is the primary focus of the consultant and why.

Summing it all up

In summary, the argument for getting a quarterly appraisal is a strong one, especially now in post-COVID times when the market is changing -- and can and will continue to change quickly in the future.

Here's how it works. You commit to a one-year span (four appraisals done quarterly) to begin. You engage with an experienced, dental-specific appraisal company with which you will sign a basic, simple confidentiality agreement (to protect yourself) and then fill out a practice questionnaire and send requested financial documents. This can all be done online and over the phone.

After you receive your first report, every three months you will simply fill out a "practice profile update" (similar to patients doing their medical update form when coming in for a recall) and submit the most recent 12-month profit/loss document (easily printed from your practice management software). You will then receive your updated appraisal showing the increase or decrease from the previous quarter, and so on. In my opinion, it's very easy to do this once you have the first one completed. The key is making the commitment for one year and then continuing to do so, all at a modest cost, which is probably much lower than you would expect (and certainly lower than doing an appraisal here and there and being charged each time to do so).

It's time for our great profession to embrace this concept. To quote from the classic movie comedy "Animal House" at Faber College, "Knowledge is good!" You are a business owner. You rely on your practice sale for retirement. Know where you stand at all times!

If you would like to know more about how a quarterly appraisal program works, please contact us at Connect the Dents at tonydmd@gmail.com.

Anthony Stefanou, DMD, CBI, is a dentist of 32 years (nonpracticing) and a certified business intermediary. He is the managing partner and founder of Connect the Dents, a dental mergers and acquisitions and business development advisory company working with manufacturers, dealers, DSOs/practices, and the Dental Sales Academy. He can be reached at tonydmd@gmail.com.

The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.


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