Demographics rule in Seller’s Market
Buying a dental practice can be a myriad of truths and myths. Since the great recession in 2008 there has been dramatic decrease in the number of dentists that are retiring, consequently a big demand exists for practice locations for dentists that have graduated and are ready to embark on their own to establish the practice of their dreams.
According to Thomas L. Snyder, DMD, MBA, Director of Henry Schein Professional Practice Transitions, area demographics has the greatest significant impact on the practice value. Where your practice is located is extremely important to its valuation in the marketplace of practice resales. Los Angeles county commands a value of close to 100% of last year’s gross revenue whereas a practice location in rural mid-America will command a practice value of 50% gross revenue.
Why is that according to Dr. Snyder? It is supply and demand. It is becoming more difficult for dentists practicing in small and rural town to attract an associate let alone a decent purchase price. 80% of the U.S. population resides in Metropolitan areas and that is where the most desirable practice locations exist.
Your overhead is a huge consideration in valuing a practice. How well the practice is managed and whether there is a steady income stream of new patients and a high retention percentage will continue to help the practice to grow annually.
Practices with a low overhead of say 50% usually command a higher value. Typical contributors to high overhead are staff salaries, staff benefits and facility costs. Long term staff have higher salary and benefits not dependent upon the practice solvency. Rent and facility costs in some areas are astronomical because of supply and demand for real estate and little margin for negotiation exists.
There are other factors that affect a practice’s profitability like technology and age of equipment and the size of the existing patient base. Most of these factors can be improved and can be beneficial if the practice is in a great location with the potential for growth.