Takeaways:

• Understanding the distinction between gross collections and adjusted collections is critical in practice valuation.
• Buyers must evaluate not only revenue but also the overhead percentage to gauge profitability.
• The quality and loyalty of the patient base significantly impacts a dental practice's overall value.
• Staff stability and tenure are essential indicators of a practice's goodwill during ownership transitions.
• The physical condition of the practice and its equipment must be assessed when determining market value.
• Confidence in the seller and transparency during the diligence process can influence buyer decisions profoundly.

Chapters:

• 00:17 - Understanding Practice Transitions
• 02:22 - Understanding Practice Value
• 12:55 - Evaluating Practice Value: Key Factors for Buyers
• 15:42 - Understanding Seller Preparation and Buyer Confidence
• 21:18 - Understanding the Five-Part Framework for Practice Acquisition

Foreign. Welcome to the Dental Business Podcast, the show for dentists who are serious about building, growing, or exiting their practices on their own terms.

I'm your host, Phil Cole, CEO of KLAS Solutions. And today we're talking about something that sits at the heart of everything we do in practice transitions. And that is the value.

Specifically, what actually makes a dental practice valuable.

Not from a theoretical, excuse me, standpoint, but from the perspective of someone who sat across the table from hundreds of buyers and has helped them win.

Now, before we dive in, a quick word about today's sponsor, and in this case, it's one of our own programs, because I believe, genuinely believe in what we've built.

And if you're a dentist who's thinking about buying a practice, whether that's your first acquisition or it's your third, I want to talk to you about KLAS Buyer Advocate Program. Here's the problem most buyers run into. They find a practice they love, and then they're essentially navigating the deal alone.

Or worse, they're relying on advice from someone who's actually representing, maybe the seller or has never done a transition like a dental transition in their career. And that's just not okay.

The KLAS Buyer Advocate Program was built to level that playing field, to present you and only you, and help you identify the right practice, analyze the real numbers, negotiate the terms, coordinate financing, and get you to the closing table without leaving money on the table or missing a red flag that could haunt you for years. If you're serious about buying a practice in the next one to three years, well, go to klassolutions.com and check out the buyer advocate.

So let's have a conversation. This is what we do, and I believe that we're very good at it. Now, let's get in today's episode. All right, so let's talk about practice value.

I've been doing this long enough to know that most dentists, whether they're buying or selling, they have that very surface level understanding of what drives the numbers on the valuation report. And I get it. You went to dental school to learn dentistry, but you didn't go to learn about mergers and acquisitions. But here's the thing.

If you're a buyer and you don't understand what makes a practice valuable, you are walking into one of the biggest financial decisions of your life partially blind. Or maybe I've seen some walk in blind.

And if you're a seller and you don't understand what buyers are actually evaluating, you may be sitting on unrealized value or worse. You might be surprised when your asking price doesn't land anywhere near what you expected.

Today's episode is framed for the buyer's perspective, because that's the lens I want more dentists to understand.

Not because buyers have more power in the market, but because when you understand what a sophisticated buyer is looking for, then you understand what practice value really should mean.

So we're going to cover five key value drivers that buyers and frankly, smart advisors that I feel like our team use to evaluate whether a practice is worth the asking price. And by the end of the episode, whether you're buying or planning to sell someday, you're going to see your practice hopefully differently.

Revenue is, is a headline. I get it. Adjusted collections is the story.

And the first thing every buyer wants to understand in production and collections is not the raw number, but they should be looking at the adjusted number. So here's what I mean by that. Let's say you're looking at a practice doing 1.4 million in gross collections.

It sounds great on paper, but when you sit down and start looking at the books, we find $85,000 in a 1 time insurance settlement that won't repeat itself. We find $40,000 in production from a visiting specialist who's no longer contracted with the practice.

And we find one, we find owner compensation structured in a way that inflates the income statement. Now all of a sudden, that 1.4 million adjusted down to 1.1 million and the valuation change changes meaningfully.

That's not manipulation, that's just the real picture. And a buyer who doesn't know to ask for what to analyze is going to overpay.

What buyers want to see is clean upward trend in collections over three to five years flat or declining revenue raises questions. Even if there's a good explanation for it, growth signals that it's healthy. It's a well run practice that can sustain its income under new ownership.

One of the first things our team does in a buyer advocate engagement is request three to five years of tax returns and production reports. And we build what we call our adjusted income statement. We normalize the numbers, we pull out the noise.

We identify what the practice is actually earning and what a buyer can reasonably expect to earn going forward. That is your baseline. In my experience, one of the most telling numbers in any dental practice is, is the overhead percentage.

For a general dentistry practice, we typically want to see overhead in the range of 55 to tops 65. I'd prefer down into 62 to be the tops, but 65, if you're north of 70%. That's a red flag, not a deal breaker.

But it does demand a conversation for sure. Now here's where it gets interesting. For buyers, high overhead isn't always bad news. It can actually represent opportunity.

I've seen practices running at 72, 73% overhead because the owner never renegotiated supply contracts, had outdated staffing models, or when carrying unnecessary subscriptions and services. I've seen a doctor that carried unnecessary subscriptions forgot to cancel, that amounted to $8,000 a year and didn't realize it.

When a sharp buyer comes in and tightens those operations, they can recapture five to eight points of margin fairly quickly. And that's real money. But you have to be able to see it, and that requires knowing what you're looking for. We break overhead into four main buckets.

You've got your staff, your supplies, your facility equipment, and your discretionary owner's expense. Each one has a benchmark range, and when something's out of range, we investigate. Sometimes there's a perfect logical explanation.

Other times, well, it reveals a problem that should change either the price or it has to change the deal structure. The takeaway here, buyers should be evaluating margin, not just the revenue.

So a $1.2 million practice at 58% overhead is fundamentally different and more valuable than a $1.4 million practice with a 72% overhead. The math on what you take home is very different. Now, let's take another look. And it's the other factor that's very important is your patience.

Here's something that doesn't show up on the P and L, but absolutely impacts a buyer's decision, and that's the quality and character of the patient base.

When I'm looking working with a buyer, one of the first things I want to see is a practice management software report on active patients, typically defined as patients who've had an appointment in the last 18, 18 to 24 months. Most brokers are going to consider it 24 months.

I want to know how many there are, how frequently they're coming in, and what their payer mix looks like. Payer mix is huge. A practice with 80% PPO patients and 20% fee for service looks very different from one that's inverted or one with heavy Medicaid.

That doesn't mean one is automatically better than the other. It depends on the buyer's goal and the local market. But it absolutely impacts revenue substantially and the growth potential.

I also want to know something that's harder to quantify but critically important, and that's the patient loyalty. So what's the reappointment rate? How many patients have been with the practice for more than five years?

Is there a strong hygiene recall program driving consistent visits? I worked with a buyer a while back.

So which one do you think was the safer buy? I hope you pick practice A. All day long, you're inheriting a patient base that actually comes back.

And the other one is a collections number built on a lot of one and done appointments, probably a bunch of emergencies. And those patients are at a risk the moment ownership changes.

Every buyer I've worked with has a version of this question somewhere on their checklist, and that is, is the team going to stay? And rightfully so. For them to ask that. The staff is the continuing bridge between the old owner and the new one. Patients trust their hygienists.

They like the front desk person who remembers their name. And if a buyer walks in on day one and half the team is gone, patient retention becomes a serious concern. And that has direct revenue implications.

What we look for is tenure.

If the practice has a front office coordinator who's been there 12 years and a lead hygienist who's been there eight, that's equity, that's stability. That's somebody who knows the patients, knows the workflows and can help a new doctor hit the ground running.

On the flip side, if we see high turnover, especially in hygiene, well, that tells me something about the culture. First of all, the compensation structure, possibly, or how the practice has been managed.

It doesn't automatically kill a deal, but we address it in the diligence process and sometimes in the deal structure for sure. One thing I always recommend for sellers preparing to list is don't make big staffing changes in 12 months before you go to market.

If you're thinking about replacing someone, think carefully about timing. Staff disruption right before a transition can shake buyer confidence more than any number on a financial statement.

We've got two more value drivers to cover, and then I want to get into the buyer mindset piece as well, which is where this all comes together. So value driver number five is the physical practice, the facility, the equipment, the technology platform. Here's the reality.

A buyer isn't just buying a revenue stream. They're buying a full operational clinical environment.

And if the environment is going to require $200,000 in capital improvements in the next two to five years, that needs to be factored into the price. Either the seller adjusts or the buyer accounts for it in their financing and projections.

What buyers and their advisors evaluate how old is the dental equipment? Is it maintained? Is it calibrated? Does the practice have digital X rays, cone beam, CT, an interval scanner?

A modern practice management software system that integrates properly? These aren't nice to have for many buyers. They're expectations. They're just rule of thumb, these terms are a huge piece.

I'm sorry, Lease terms are a huge piece of this too. If the practice is in leased space and most are, what are the terms? How many years are left on the lease? Is there a renewal option?

What's the landlord's like to work with? I've seen deals stall or fall apart because the lease situation was a mess.

A practice doing $1.3 million in a building with two years left on the lease and no renewal clause is a much more complicated buy than then the same practice with 10 years and two renewal options locked in for sellers. Take a hard look at your facility before you list. Address the obvious deferred maintenance.

Make sure your equipment list is documented and your maintenance records are accessible. If you've invested in technology, document it because it adds real value and buyers need to see it.

For buyers, build a capital expenditure estimate into your financial model before you make an offer. Don't let enthusiasm for a great revenue number blind you for what's going to cost you on the other side of closing.

Now let's go beyond the numbers, the intangibles that move buyers. Let's get into something that doesn't show up on any spreadsheet but drives buyers behavior in a major way.

That's confidence and specifically confidence in what they see is what they're going to get. I've watched buyers walk away from objectively good practice because the seller was evasive during diligence. Not dis. Not dishonest, but just evasive.

Couldn't produce clean records. Hesitant on certain questions, seemed defensive about the overhead numbers.

And I've watched buyers overpay slightly for practices that maybe weren't the most perfect opportunity because the seller was transparent, was organized and confident in their data. The story was clean, the documentation was ready. The team was warm and welcoming during the site visit.

Buyers are buying confidence as much as they're buying collections. They're asking can I see myself here. Do I trust this transition? Will the patients stay with me? Will the team support me?

Is this seller telling me the truth? That's why our team at KLAS puts so much emphasis on seller preparation.

Even when there's representing the buyer, we know that a clean, well documented listing sells faster, attracts better buyers and closes more smoothly. It's good for everyone and it's fair for everyone. One more intangible I should say want I want to highlight.

And that's local representation or I'm sorry, not representation, representative reputation. What's the practice's standing in the community? Is a doctor well regarded? Are there online reviews that back that up?

Is there any history of patient complaints or state board issues? We need to know about a practice's community. Reputation is an asset and it absolutely belongs in the value conversation.

What it actually looks like when someone's in your corner is wanting you to know that. We take a few minutes here and we walk you through what the KLAS buyer advocate process actually looks like.

Because I think there's a misconception out there that a buyer advocate is just a negotiator who brings it to the end and be brought in at the very end and just get that done for me. That's not what we do. Our engagement starts before there's even a listing on the table.

We sit down with the buyer, whether that's a new grad who's never owned a practice or an experienced multi location operator. And we do deep discovery. What are your goals? What kind of practice are you looking for? What market? What size? With clinical focus.

What what's your financing picture look like? Then we go to work. We have relationships with sellers, with other brokers and advisors across the country.

We're often aware of practices coming to the market before they're publicly listed. And when a listing looks right, we bring it to our buyer with a preliminary analysis already attached.

When a buyer is seriously interested, we go into full due diligence mode. We have to build the adjusted income statement I mentioned earlier. We want it done the way what we're looking at.

For you to analyze the patient metrics, we need to assess the facility.

We need to model out what the practice's cash flow looks like under new ownership, accounting for buyers, compensation expectations, debt services from the acquisition loan and a reasonable Runway for growth. Then we will look at seeing what the fair price or the fair value is. And do we need to negotiate not just price, but we also need to negotiate terms.

Seller transition support, non compete language, equipment representation, lease assignment, staff retention, Commitments. These details matter enormously and most buyers don't know what they don't know.

We coordinate with the lender, we work alongside the transaction attorney and we make sure everything is moving towards a close date with no surprises. And when the ink dries, our buyer knows exactly what they bought, what they paid and why it was the right decision.

That's what having an advocate in your corner looks like. And if you've ever been through an acquisition without one, or you know someone who has, you understand why this matters.

Whether you're actively looking to buy, planning to sell in the next few years, or just wanted to understand how your practice works would look to an outside evaluator. Here is that five part framework we've covered today and I want you to write this down or bookmark this episode. 1. Remember adjusted collections.

What does the practice actually earning? Normalized for owner specific expenses and non reoccurring revenue? 3 To 5 years of trending data. Also 2 overhead percentage.

What percentage of collections goes back out the door? Is it within benchmark range? Where are the opportunities to improve the margin? 3. Patient based quality how many active patients?

I cannot emphasize this one. How many true active patients does the practice have? What's the payer mix? What's the reappointment rate? Another key factor?

Is there a strong hygiene program anchoring recall? 4. Staff stability. How long has the key team been there? Is there evidence of a healthy culture? Is turnover a concern?

I hear many times where doctors do not think think that that's important. But I will tell you the goodwill of the practice is not just the doctor. The goodwill of the practice is the team along with the doctor. 5.

Facility and equipment what's the capital picture? What are the lease terms? Is a technology platform competitive?

Run any practice through this framework, including your own, and you'll have a significantly clear picture of its true market value. And you'll know exactly which levers to pull to increase that value before a transition.

If you want to go deeper on any of these areas, this is exactly the kind of work we do here at KLAS with our Buyer Advocate program and across all of five of our divisions. Just head over to klassolutions.com, shoot us an [email protected] and we'd love to have that conversation.

So if today's episode resonated with you, if you're a dentist that is thinking seriously about acquiring a practice and you want someone who knows this process inside and out working exclusively in your corner, I want to hear from you the KLAS Buyer Advocate is a full service representation model from practice identification and financial analysis through negotiation, financing, coordination and all the way to the close. We're your team and we represent you and only you.

In a market where practices are competitive and sellers often have experienced advisors on their side, you need the same don't go into the biggest financial decision of your career without someone fighting for your outcome. So that's a wrap for today's episode on the Dental Business Podcast. Thank you for spending this time with me.

I hope this gave you a new lens for thinking about space, practice, value, whether you're on the buying side, the selling side, or somewhere maybe just in between right now. Until next time, I'm Phil Cole and this is the Dental Business Podcast.

If this episode added value, please subscribe, leave us a review, and share it with a colleague who's thinking about buying. It genuinely helps us reach more dentists who need this information.