Practice Value 101: The 3 Drivers Behind What Your Practice Is Worth

If someone showed up at your practice tomorrow and asked about your practice, or what I keep hearing is that you get that letter in the mail, would you know what your practice is actually worth? Not what you hope it's worth, but what you can actually prove it's worth. And the reality is, most dentists don't. They confuse production with value, patience with profit, and think working more means earning more. But value isn't volume. Value is margin. Systems and predictability. Welcome to part one of our three part training on practice value. I'm your host, Kelly Damer and today we're breaking down the three true drivers that determine what your practice is worth. Whether you're selling now or you just want more freedom later, this is really important to know. So let's get into it. Here's the three things we're going to be talking about today. Why production does not equal practice value. That means collection. 2. Collection does not equal practice value. We're going to break down the three drivers of value, which are profit, repeatable systems and stability. And we're going to be going over the number one thing that matters more than production, which is ebitda. So, ebitda, what is ebitda? Right, because I think that it's a buzzword. If you haven't heard it by now, you'll start hearing it everywhere. It's ebitda, ebitda. I've heard it pronounced many different ways. But EBITDA is really now the true determining factor for your value. It's your true profitability. It's technically an accounting term that stands for earnings before inc, interest, taxes, depreciation and amortization. But in a, at a very basic general sense, it's your true value, true profitability. It shows what you keep after expenses and without fluff. So that means that add backs are included in there. You need to make sure that you're taking into account your actual compensation for yourself, whether that's a draw, whether that's W2 income. So we're going to be talking more about those add backs on our next section of this three part series. So make sure you tune into that if you're more curious about that. Today we want to talk about the fact that EBITDA is what buyers are actually buying now. Now, don't get me wrong, if you want to go a doctor to Dr. Sale, your practice value is largely still determined on collections. Okay? You can expect anywhere from 70% to 80% of your collections for a doctor to doctor sale. They will still be looking at specifically the bank, unless this Is a cash offer what your EBITDA or your profit is as well as cash flow. Because the bank's going to want to determine, okay, that new buyer who's buying this, how, how likely are they going to be able to make the payments back to them, right? That's, that's what they really care about. So EBITDA is the number one thing to really be keeping an eye on right now. And how I would say to manage EBITDA is it's not just what you produce, it's not just what you collect in top line revenue, and it's what is left over after all of those expenses. So how effectively are you actually running your practice? Another really important thing that buyers are going to be looking for, specifically group buyers, roll ups, maybe even a dso. A traditional DSO is going to be systems. You have to think about it this way. If someone's buying your practice and you're not going to be there eventually, how risky is that? Is everything revolving around you? Are you the main producer? Are you involved in all the administrative side of things? Are you having to be there in order for things to get done? Is micromanaging happening? So systems is how you really show more value for your practice because heaven forbid something happened to you and obviously the reality is at some point you'll be transitioning out. How likely is that practice to succeed without you is what the buyers are going to be looking at. So really making sure that you have processes your team follows without you is something that's going to be important. No systems equals the fact that you're not going to be able to scale, which equals the fact that value is going to be largely decreased. So think about where you can maybe plug and play different things, right? How can you plug and play production? Do you have an associate who is also aligned with your standard of care? Is your hygiene department pumping? Are you producing about 30% coming out of your hygiene department? And do you have room for expansion? Because that's going to be another thing that's really important that buyers are going to want to see as well. You really need to be thinking about the fact that a lack of systems is going to be risky. So how dependent is the practice on you? The more it depends on you, the more the less it's really worth. On the flip side, what's the risk for you? You know, specifically looking at some sort of a roll up type of transaction where you are joining forces with like minded practitioners, they become your business partners, you have the backing of a group organization and then you're selling a portion of your practice and retaining a portion of equity. So I want to talk to you about Dr. W, who I recently was connecting with. And you know, when I first started talking to Dr. W, he was under an immense amount of stress. He felt that his practice was failing mainly because, let me lay it out for you, he's collecting 1.6 million annually. He's bringing home $4,000 a month. And you might be thinking, how is that even possible? And that's where his thought process was, like, this is a burden on him. Which is absolutely correct. But it wasn't that the practice was failing. He also owned his building. The building is 20,000 square feet. It's a strip mall. And he's only occupying 4,000 square feet of that with his practice and there's no other occupants. He's having a hard time with the commercial real estate side of things, which technically is not a reflection of the success of the practice. Right. So what he's doing, he's actually paying 16% of his collections, is going towards rent. He's basically tripling or quadrupling his market rate rent payment so that he can cover his loan payment for the building. So obviously he's, he's utilizing, it's smart, right? He's utilizing his asset to do that. But it's, he's in a, definitely a strain. And when we first started talking, you know, he was ready to, to just hang up the loops, call it quits, throw in the towel. And we really broke it down and looked and we said, okay, if you were to sell doctor to doctor right now, you would be looking at about $1.1 million for your, for your practice, and you'd have to be out in six months. There'd be no equity, you know, on an over $2 million business building loan. Is that really going to work? I, you know, that's up to him. But the long answer or the short answer is actually no. If he decided not to go that route, you know, he would have gotten some cash. But he also has a five year timeline for work, so he doesn't want to be out in six months. Or the alternative was putting in one year's worth of work to add an additional 125,000 to his EBITDA so that he can actually sell cash at close 1.26. Now you might be thinking that's not much of a difference from the 1.1, but that's actually only selling 60% of his practice. He'll retain 40% in equity, he'll receive Some profit sharing. He'll continue to work as an associate. So he'll be actually an almost an employee in his business. Right. And earn 30, 35% of his production or collection. But the big thing is he can actually offload his ownership. So those, the heavy weight of, you know, managing the team, payroll, IT account, all of those things he's able to offload to a group to help support him with that. So what we did was we helped him clean up his books, we helped train his team, and we helped really streamline his treatment flow. Within one year, his total value becomes $7 million, including equity, profit and salary. He plans to take advantage of two recaps. Uh, a recap is basically when the bank changes hands behind the scenes and you have an option to be able to cash out on your equity. He's going to roll a portion of his equity at that first recap and be able to take advantage of the second recap and then continue working for the next five years and actually enjoy what he's doing. So I know if this is the first time you're really looking into practice value, potentially even maybe a roll up or a partnership like that, everything I said might just seem like a foreign language. So just know that the first time I heard all about this many years ago, I was like, what is going on? I happy to meet with you individually and walk you through and explain some of these details in more detail. If you'd like, you can click the link below in the show notes and just get on my calendar. I'm happy to break that down for you as well as actually walk through what your practice value looks like and help you really determine what your practice value is right now and put a plan together so that's available to you. Go ahead and click the link below. All right, so let's recap. We really talked about how the most important thing that you can do now, whether you're thinking of selling tomorrow, in three months, in three years and 30 years, is to understand what your practice value is now. So one wise once told me that the best way to manage your business is to manage it from day one as if you intend to sell it. That's the cleanest, most efficient way to run your business. So understanding what your practice value is now is step one and then identify your timeline again. It could be right around the corner, it could be very long term. But if you don't understand what your timeline is and have a specific plan in place, that's also not a very efficient way to run your business. And then put a plan in place. Right? So again, it could be, hey, we're going to continue to grow X percent over the next few years, or this is the dollar a month I want to receive. How do I get there? Putting a plan in place and having actual tangible steps is going to be really important as well. So this is only the first part of our three part series on practice value. Make sure you tune in next week because we're going to be breaking down the specifics on how to improve profitability. Hi, I'm Kellie Damer and this is the Next Level Practice podcast. Here's to creating a financial legacy you deserve.