Buying a Practice - Understanding the Difference between Price and Value
Updated: May 13, 2019
When buying a dental practice there is a lot of attention paid to the selling price, but very little to the practice value. It is important that practice buyers understand these concepts and the difference between them, since practice value has significantly more impact upon the future of buyers than does the selling price.
Price is the consideration (cash, note, etc.) paid to a seller to acquire an asset. The seller receives the price. Value is the benefit received by the buyer from the use and ownership of the acquired asset. The buyer receives the value.
Too often buyers focus on price as the primary practice purchase issue, while ignoring the issue of value. However, buyers stand to benefit significantly more by receiving high value than by paying a low price, since the primary practice value in reality is the net income the buyer takes home from the purchased price.
To understand this concept, let's look at two similar practices:
Practice A has collections of $400,000 and is priced at $275,000. If you ask a buyer if this is a good deal, many buyers admit they don't know.
Practice B also has collections of $400,000, of which the hygienist produces $100,000 and the seller produces $300,000. After paying all of the overhead expenses and all of the purchase payments, the buyer will have a net income of $140,000. Without even knowing the price, many buyers believe that Practice B is a good opportunity. However, knowing the price and gross alone does not make for a well-informed decision. Knowing the cash-flow-derived value, or net income, received in return for the amount of work performed by the buyer, does allow for a well-informed decision.
Now let's look at Practice C, which has collections of $400,000 and is priced at $300,000. After paying all of the overhead expenses and purchase payments, the buyer will receive value, or net income, of $150,000.
Now examine Practice D, which is very similar with collections of $400,000, but is priced as $250,000. After paying all the overhead expenses and purchase payments, the buyer will receive value, or net income of only $125,000. This comparison shows that it is actually possible to pay a higher price for a practice and still receive more value, or net income. Differences in fixed expenses such as rental cost, can cause these kinds of differentiations.
Which practice would you choose?
While not suggesting overpaying for any practice, it is wise to heed the old saying, "you get what you pay for." Since "what you pay for" is net income in the case of dental practices, higher priced practices should yield higher net incomes, even after making the payments.
If you are considering buying a practice, one of the most important things you can do is to surround yourself with a professional team of advisors including a CPA, attorney and banker who have experience working with dentists as clients. This team can offer professional advice on price, while making sure that you receive a practice cash flow analysis to learn all of the important facts - especially the answers about practice value, the net income you will earn.
Grant Gerke is the founder and president of Mountain Top Practice Transitions. He has spent 25 years in the dental industry and personally services the Western United States. He is located in Portland, OR and can be reached at (503)-701-6697 or write to him firstname.lastname@example.org