July 23, 2020
How Does the COVID-19 Pandemic Affect Dental Practice Valuation?
We’ve gone through some crazy months with the COVID-19 pandemic shutdown. Those owning dental practices undoubtedly wonder how locking their doors for all procedures aside from emergencies would affect their numbers and, in turn, the value of their practice.
Unlike businesses, such as restaurants, ride-sharing services and even amusement parks, whose revenue during the shutdown is lost forever, revenue for dental practices was delayed but not lost. This is because tooth decay, impacted wisdom teeth and braces can’t be treated at home.
Most likely, you are working harder than ever before to ensure you meet the pent-up demand from the shutdown. Your numbers reflect the additional hours you are seeing patients and the accelerated hygiene program you have implemented.
While your concerns during the spring are warranted, it is still important to know where your practice currently stands. The best way to do so is with a practice appraisal so you can start working off facts instead of feelings.
When a dental practice valuation is created, your financials are incredibly important. But not only your financials are considered. In addition to your top-line and bottom-line numbers, understanding your practice in and out is imperative. To do so, reports from your practice management software are also necessary. Now is the time to dig even deeper.
Reports from your practice management software
Here are some of the reports you can get from practice management software, such as Dentrix, Eaglesoft, OMSVision, WinOMS and Open Dental:
- Production summary by category: A buyer will want to know everything there is to know about your practice before making an offer. A common question is the type of procedures you do in-house. They want to know if they can replicate the type of dentistry you perform. Do you place a lot of implants? Do you refer out most surgery?
- Practice statistics: Your practice statistics report will give you a statistical snapshot of your practice. A potential buyer is interested in looking at this so they can develop a strategic business plan if they decide to buy your practice. The report easily groups together statistical information about your practice, such as patient demographics, continuing care statistics, new patient stats and the number of patients per provider.
- Aging reports: While your accounts receivables tend to not be included in your practice value because it is always changing, it still holds value. Aging reports help determine how your practice is collecting its accounts receivable, as well as tracking family and insurance balances. A good rule of thumb is to expect 85% of your accounts receivable total on top of the fair market value of your practice, if you are planning to sell your accounts receivable in addition to your practice.
- Ratio of patients with insurance versus cash-pay patients: Most buyers have a preference of fee for service (FFS) versus insurance when buying a practice. While some may not care, almost all want to know the breakdown. Is the practice 50% insurance-based and 50% FFS? Is it mostly insurance based? This report will do the hard work for you when finding the answer.
- Patient demographics report (by age or ZIP code): A buyer does not need to know exactly who your patients are (after all, that would violate U.S. Health Insurance Portability and Accountability Act (HIPAA) laws). They do, however, need to know the type of patient you see. Do they skew younger or older? Do they live near the office, or do the majority tend to travel a long distance to see you? Understanding who the patient is by demographics allows a potential buyer to understand even further what they are investing in, as well as potential attrition rates.
- Production summary by American Dental Association (ADA) code and category: In addition to the breakdown of production by category, a buyer will also want to know how much of each procedure contributes to your overall revenue. They are also interested in learning what each provider is producing and collecting. This includes not only the seller, but also associates and hygienists. It is important for a potential buyer to determine at what level they will need to produce to maintain practice revenue, especially if the selling doctor is not staying onboard.
Determining the value of dental equipment
We all wish that the value of your dental equipment is close to what you paid for it. However, similar to a car, the value decreases once it leaves the lot. Of course, this is not to say that there is no value because there is. When determining the equipment value, your valuation creator will look at it as if you were to place it on eBay or Atlas Resell Management. Aspects that will make this part of your valuation to be the most valuable are if your dental practice is digital, if you own a laser, conebeam, digital pan, CAD/CAM or 3-D printer, and if you’ve recently remodeled your office.
The importance of financials
Last but certainly not least are your financials, which are very important for determining your practice value. When looking at your financials, the past three years are considered but at different levels. The most recent year is weighed the heaviest followed by last year. The year before is weighed the least.
The great news is that if your practice has been around for a few years, you don’t need to factor in your 2020 numbers when determining the value of your practice. While we can’t simply erase 2020 as much as we may desire, we can at least revel in the fact that those few months of being closed doesn’t affect your largest asset. This is only the case if you have historical data to work off of.
If you purchased your practice within the past year, 2020 numbers must be included. Yes, since you reopened, your financials look great. However, the closed months can affect your overall value significantly with such little data to consider within the valuation, therefore, becoming detrimental for your practice value.
How will COVID-19 affect your dental practice value?
The details of how you reopened your practice after the COVID-19 shutdown will not affect your practice value. If you are considering selling all or a portion of your practice, it is valuable information to the buyer. Some of the most common questions asked are:
- How many weeks were you/are you closed?
- When did you/do you reopen?
- Were you open for emergencies?
- What day did you/will you reopen at reduced capacity?
- What day did you/will you reopen at full capacity?
- Do you expect all staff to return upon reopening?
- Did you receive a Paycheck Protection Program (PPP) loan? If yes, how much did you receive, and when did you receive the funds?
- What post COVID-19 operation measures were taken? Did you require N95 masks, face shields, disposable gloves, headcovers/booties, UV lights, extraoral suction, rubber dams on all patients, implement hand scaling only, pre-procedure mouth rinse, patient questionnaires/waivers, temperature checks, social distanced reception areas, etc.?
How goodwill affects a dental practice’s value
While not tangible and maybe a bit harder to understand, the goodwill within your practice will make up a good part of your practice’s value (as much as 80%!). The goodwill makes up those non-categorized assets, such as your community status, patient relationships (shown many times through your recall systems, active appointments, patient charts and referring doctors), and staff loyalty and longevity. This goodwill, when the practice is transitioned correctly, ensures long-term income for the buyer.
What is affected by COVID-19?
While your practice value may not be affected by COVID-19, what may be affected, if you are looking to sell all or a portion of your practice, is the closing date. Many banks and institutionalized buyers, such as dental service organizations (DSOs), ask for your practice to be open anywhere between one to three months after you reopen to ensure that practice stability is not an issue. In this same regard, they will ask for your practice to be producing at least 80% of your pre-pandemic production.
While we do not know what the future holds and when 2020 numbers are factored into a valuation, you can at least gain a better sense of where you are now and your options by getting all the facts.
To understand the value of your practice, post-pandemic, and make an educated decision on the future of your practice, contact the experts at Professional Transition Strategies.
To learn more about different appraisals methods are best for dental practices, check out the July issue of Dental Economics.