Dr. Stan Winfield practiced general dentistry in a mid-sized eastern city. At 62 years of age, he was the picture of health. He believed in exercise, good diet, and a complete physical examination yearly. His blood pressure and cholesterol levels were within normal limits. No one could have predicted that Friday, Sept. 8, 2000, would be his last day of practicing dentistry. That evening at home, he had a stroke that left him permanently paralyzed on his right side.
Dr. Dave Goodman practiced general dentistry in a small town in the Midwest. He had three children under age 12, a loving and devoted wife, and a huge mortgage. Little did he realize that when he left for the office that fateful Wednesday morning , it would be the last time he would ever see his wife and children. A drunk driver careened head-on into his car, killing him instantly.
Both of these situations are real, although the names have been changed. Although the scenarios are different, each had the same result: Production ceased in both practices; neither doctor had a plan in place to direct the disposition of their practices. When death or incapacitation of the doctor occurs suddenly, the value of the practice deteriorates anywhere from 1 to 2 percent per day. In many situations, the initial reaction by the spouse or family is to lay off the staff, close the doors, and contain costs. When word gets around that the doctor is unable to practice, patients scatter quickly. Although the real estate and equipment value will remain constant, the true value of the practice � the patient base � evaporates rapidly.
One of the benefits of a group practice is that if one doctor becomes incapacitated or dies, the practice can continue uninterrupted care for its patient base. However, since most dental offices are solo practices, it is extremely important for the doctor to have a plan in place in the event he or she should suddenly become unable to practice.
Developing a plan
If you are married, your spouse will have to make some important decisions regarding the practice. If you are single, someone should be designated to handle the disposition of your practice. Here are some important guidelines:
1. Make sure your spouse/designee knows where to find these important documents: Life insurance/disability insurance policies; computer password and access to accounts receivable; copy of office lease; location of accounts payable file and any other debts owed by the practice; tax returns (both corporate and personal) from the last three years; payroll tax information; list of all equipment with latest market values, if possible.
2. Collaborate before an emergency with a few close friends to keep the practice open while the transition is being completed. Being a part of the local dental society is a good place to form alliances with other doctors who could donate some time each week for a month to keep the practice open.
3. Have ample cash reserves to cover practice overhead for at least two months.
How soon should the practice be sold?
When it has been determined that the doctor can no longer practice dentistry due to debilitating illness, the practice should be sold as soon as possible. However, in most cases it will be difficult to locate a buyer quickly.
Keeping the doors to the practice open by enlisting the services of temporary doctors is vitally important to preserving the patient base. Some states have temporary doctor services available. While the cost of hiring a temporary doctor can be expensive, one must weigh the cost against losing those patients whose dental needs cannot be met.
Another way to keep the practice viable for a short term is to utilize the services of several local doctors who agree to volunteer one day per week every seven to 14 days. Even having a retired, semi-retired, or doctor/educator with a valid license on the premises can permit the hygienist to continue to see patients in states with direct supervision.
It is also important that the doctor's designee:
1. Calls all patients scheduled for the next two weeks and confirms their appointments, assuming temporary coverage can be arranged.
2. Meets with the staff and encourages them to stay. Assure them of your efforts to keep the practice open.
3. Enlists a practice broker/appraiser quickly to arrive at an appropriate practice value.
4. When details of the sale are completed, send a letter to all active patients of record introducing the new doctor. This letter can come from the spouse or the spouse�s attorney.
There are many different ways to determine practice value. However, many variables affecting practice value can exist within different practices. Here are a few:
Percentage of managed-care patients in the practice -- Since managed care affects profitability negatively by requiring sometimes steep discounts, a practice with a high percentage of managed care typically would not be as valuable as a traditional fee-for-service practice.
Location -- A favorable location with good street visibility and ample parking adds to practice value. However, if the practice is located in a declining section of town, practice value will suffer.
Three-year history of practice growth or decline -- It is extremely important for any potential buyer to look at a three-year history of practice profit. Practices that show a steady decline may be beset with complicated internal problems or area saturation. This is not to say that one should not purchase a practice that shows decline. Many doctors have been able to revive declining practices with smart marketing strategies, planning, and hard work. A practice that shows steady growth typically carries less risk to the buyer.
Accounts receivable, especially over 90 days -- Accounts receivable is generally considered healthy if it does not exceed one to one-an-a-half times the monthly production. However, a high percentage of bad debts and delinquent accounts affects practice value negatively. Uncollectible accounts receivable should be written off to reflect the true accounts receivable of the practice. The true A/R can be artificially inflated when doctors do not write off uncollectibles.
Computer system -- Up-to-date computer software adds value to the practice.
Age and condition of equipment -- If the equipment is old and outdated, it may be of little or no value to a new owner. However, well-maintained, modern equipment adds value to a practice. An equipment dealer or appraiser usually determines the market value of the equipment.
Office square footage -- An extremely small office space with no possibility for future expansion will negatively affect practice value. The opposite is also true.
In general, a healthy dental practice with many positive features can be worth as much as two years� net profit, plus 80 percent of the accounts receivable under 60 days. (Some sellers prefer to retain the A/R. This is a decision that the seller has to make.) For example, if a practice grosses $200K with an overhead of 60 percent, the profit should be $80K. Thus, the practice price (aside from A/R) should be $160K.
Another general formula for determining practice value is to take an average of collections for the past three years and figure 65-80 percent of that number. Use the higher percentage if the practice shows growth; use the lower figure if the practice shows steady decline. This includes everything in the practice � patients, equipment, copy machine, etc.
Both of these examples are simple ways to determine a ballpark figure. A professional appraisal can give more precise data. The bottom line is that the practice is worth what someone is willing and able to pay.
It is in every doctor�s best interest to position the practice for maximum profitability so that survivors can maintain their current lifestyle and reap the benefits of the doctor�s labors. Careful advance planning can ensure a smooth practice transition.
Dianne Glasscoe is a practice management consultant, author, and speaker. She is CEO of Professional Dental Management based in Lexington, NC. She may be reached at (336)472-3515, email [email protected] , or visit her website at www.professionaldentalmgmt.com
