MAXIMIZING PRACTICE OWNERSHIP VALUE
There are two fundamental practice values that every practice owner has. The first is the “operational value” of the practice. That is its value as a “going concern”, as accountants say, to continue operating as a profitable enterprise. The second is the “exit value” of the practice. That is the value you can expect to realize when you sell your practice.
If you own your practice for 30 years before you sell it, then your total ownership value is 30 years of realized operational value followed by a single instance of realized exit value. It’s like a big cake with a cherry on top of it.
When doctors reach a certain age and begin to contemplate retirement timelines and options, the value of the cherry becomes more important to them. They want to maximize exit value … either because they need the financial infusion into their retirement accounts, or because they want to memorialize all the years of sweating and fretting over their practices.
Let’s put exit value into context. The average endodontic practice completing 3 to 4 cases per day is likely to sell for between 60% to 75% of gross revenues. Splitting those ranges down the middle means a practice doing 3.5 cases per day on average (5 days per week, 48 weeks per year, at $1250 per case) has gross revenues around $1 million per year. That practice might sell for around $675,000 or within a certain range of that amount.
Given the average profitability of practices at this level, the practice is going to sell for about 2 years of doctor income. This is just an illustration, not rules. Every practice is different and will have an individual valuation. But realistically, the difference between an exit value of $600,000 vs. $750,000 is a drop in bucket over the course of an entire career. That’s the key understanding. No matter how good an exit value you receive, it’s nothing compared to the 30+ years of operational value.
The best way to maximize your total ownership value is to maximize your operational value from year to year. Coincidentally, maximizing your operational value is also the best way to maximize your exit value when you’re ready to sell.
From the operational side, let’s consider again the average practice completing around 3.5 cases per day. Financial surveys of endodontists reveal the average doctor has an income of about $330,000 per year (which is less than what an associate would usually be paid for completing the same procedures). Assuming they maintain this level of productivity for 30 years of practice ownership, then the 30-year operational value for the owner doctor is effectively $10 million.
If the same doctor was able to add 1 case per day (from 3.5 to 4.5 on average), then their revenues would increase by $300,000 annually. Since all fixed costs are already paid, almost all of the incremental revenue flows to the bottom line as increased profit. That has a 30-year value of nearly $9 million (on top of the original $10 million). You could achieve the same result with 2 more cases per day for 15 years, or 3 more per day for 10 years.
10 years from possible retirement is a key point for many doctors. This is when they begin to obsess about maximizing practice value (for a difference of a couple of hundred thousand dollars at best). Instead, they should be thinking about maximizing their operational value at the height of their endodontic skill and expertise. That could make a difference of $5 million to $10 million over the same period of time. Which would you prefer?
I’m not saying you need to become an endo factory. There are 8 hours every day and I don’t know any experienced endodontist with today’s techniques and technology who is taking more than hour for head-down clinical treatment of the average root canal. If you’re completing 3 to 4 cases per day, what are you doing with the rest of your time? It’s likely you’re doing a lot of things that could be delegated to a properly trained team.
It’s entirely possible to do 6 or 7 cases per day in an easy relaxed way and still have enough time for consults and other doctor essentials. As a business owner, the incremental operational value to you of being efficient and productive each day is massive, and it’s worth way more of your energy than worrying about that comparatively small exit value cherry that is years away.
Next month, I’m going to continue the story of operational value and exit value, and I’ll tell you why retirement is the wrong time to sell your practice. Stay tuned.