Common Practice Pitfalls that Lower Valuations

In the Transitions division of our business, where we help dentists sell their practices, we’ve seen a few common decisions that make some practices much harder to sell than others. When a practice is harder to sell, we get fewer offers and lose a lot of negotiating leverage with potential buyers.

To be clear, our intent with this article is to help you make an informed choice if you are thinking about going down one of these roads. 

Not Investing in Clear Practice Financials

Medical practices have unique accounting best practices when compared to other businesses. If you are not using a CPA who has experience with medical practices it may be difficult for a future buyer to easily get a clear picture of the financial engine of your practice.

It is understandable that many doctors make the choice to use the least expensive bookkeeper and accountant option early in the life of their practice. It’s easy to stay with what you know, and there are often more pressing or exciting business challenges to face. 

Take a look at your financials. Is there a large catch-all account (or two) on your books where multiple different types of things are tossed in? If you are unsure about the quality of your financials, there are a couple of options. 

The first is to find a bookkeeper and accountant who have experience working with practices like yours. Ask around. Have them check your most recent reports. Ask them what they would do differently. Ask what concerns or questions they might have. As long as you approach them outside of tax season most are usually willing to help and can provide significant value to you in just a few hours of work.

The second is to engage a transitions firm for a valuation. This process will dig into your books and determine any outstanding questions that they pose. Valuations range in price from $3,000 to $5,000. 

Using a “Unique” Practice Model

In general, the further you stray from the typical business model of a practice of your type the more difficult a future sale will be. Fewer buyers will be interested in a non-standard business model. 

The lack of interest is mostly due do falling outside their area of expertise and risk profile. Think of it like a home sale. Imagine the difference in difficulty trying to sell a standard four bedroom home in a suburb versus a highly customized house on a large lot, with a detached woodworking shop. There are more sunk costs in the customized house, but the majority of home buyers are not willing to pay what you paid for your customizations and additions. Its true, you might find someone who loves what you did and values the woodworking shop. Even then, it usually takes more time to find that perfect buyer (if they exist).

Practices Where the Owner Practices Across Multiple Specialties 

In any practice sale one of the largest risk factors for a buyer is maintaining production during and after the sale. If you have been practicing across multiple specialties in your practice you may be very difficult to replace for a buyer. This is especially true if your production across different Specialties makes up a significant portion of the practice’s revenue.

It can be helpful to think about how easy or difficult it would be to replace yourself in the practice with outside practitioners. if you are splitting your production between two major specialties, and volume allows, consider hiring another associate to handle one of those specialties.

Know and Stick to the Market Contract Rate and Terms For Associates

Do your homework when you hire Associates or other Providers. Try to keep their contracts standard for the market you are in. Associates on an overly generous contract become liabilities during a transition because they hurt the bottom line and are unlikely to put up with a reduction in their contract compensation.

Excessive Advertising Spending

Ideally your established practice generates the majority of its business through word of mouth referrals, provider referrals, online reputation, location visibility, and internal processes that keep patients engaged. These sources are generally higher return on investment than spending money on outside advertising. They are also more valuable to buyers. 

If you find yourself spending an above average amount on advertising while not having the sources above firmly in place, it can hurt your valuation. 

If your practice finds success with an advertising-focused marketing model that is great! Just know that being able to clearly articulate the “secret sauce” to buyers will be important. A well thought out advertising plan that can clearly show ROI is an asset. Unsubstantiated advertising spending can be a liability.

Getting Past True Breakeven

Lastly, do whatever you can to get your practice producing at a level that pays for your time at a standard market rate without any accounting shenanigans. It can be easy as the owner to structure your compensation differently than a typical provider. 

Set yourself up on a standard, market-rate, compensation plan. If it is standard for a provider like you to earn 30% of collections, pay yourself 30% of collections on payroll. If the practice volume is too low to pay you a market rate plus cover the expenses of the practice, it’s time to increase production, reduce expenses, or both. 

If you have been in this position for over 18 months it may be time to ask around for a consultant recommendation. There is no shame in asking for some outside advice on how to run your business more profitably. Getting past break even is a critical inflection point for your business. 

Dave Williams

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