Back to Articles

PRICE – It’s Not What It’s Cracked Up To Be


by Earl M. Douglas, DDS, MBA, BVAL

I’m currently doing an analysis for a client who will be selling his practice. It’s rare that someone who has been offered 120% of their gross income for their practice and an offer to work for five years after the sale for $350,000 per year would bother to ask if it were a good deal or not, but this dentist did. Here’s the statistics of this actual real life practice and that offer he received.

Price Offered 120% of gross, cash at closing
Five years of commission at $350,000 per year
Stock
Total Revenues

$4,200,000
$1,750,000
$250,000
$6,200,000

So what is there to think about? Just grab the money and run, right? But on the advice of his sage accountant, he called me and asked, “Earl is this really a good deal for me?” I told him it depends. Compared to what? Comparing this delicious offer to an alternative option, that of keeping his practice for the next five years and then selling it for $2,900,000 or 75% of his gross to a buyer who wouldn’t require him to stay on could have its advantages. And he could retire. Now let’s take a look at this seemingly less attractive option.

Practice Price 75% of gross, cash at closing
Five years practice net income
Total Revenues

$2,900,000
$6,900,000
$9,800,000

It appears that this alternative would net the seller $3,600,000 more than that fantastic offer. Now I do realize that an extra $3,600,000 may not mean a lot to some dentists, but for those it does, we should understand how the difference came about. It’s obvious that the sale price in the wait-to-sell option is considerably lower, however the seller earns over $5,000,000 more net income by working for himself instead of someone else. This owner currently nets 54% of his personal (not the gross) production and the buyer’s offer was only 15%, providing they did not load him up with extra work from new managed care plans, which would make that percentage even lower.

There are great bragging rights by selling your practice for 120% of gross, but understand that it is the seller paying that price, not the buyer. By the way, these results are consistent with practically any size practice, not just this mega practice.

So the takeaway from this little story is don’t be flattered by high price offers and bamboozled by terrible terms. It’s always a good idea to seek expert guidance in reviewing critical options before finding out the hard way that price is not always what it’s cracked up to be. Remember that sellers walk away with the bottom line, not the top one.


Testimonial from a Satistfied Dentist

"Over the past two years, I have worked with Jim Howard to purchase two dental practices and without his expertise in completing dental transitions and his willingness to go the extra mile for both the buyer and seller, it would not have been possible. One of Jim's greatest assets is his practical experience as a dentist because he understands the human element of what a selling and purchasing dentist go through when completing a transition. Jim utilizes this experience along with his integrity and fairness, to make the transitions beneficial for both parties. These attributes have made my experience working with him very positive and I look forward to working with him again in the future."

Barry Farrell, Brush Dental Care

Back to Articles

PRICE – It’s Not What It’s Cracked Up To Be


by Earl M. Douglas, DDS, MBA, BVAL

I’m currently doing an analysis for a client who will be selling his practice. It’s rare that someone who has been offered 120% of their gross income for their practice and an offer to work for five years after the sale for $350,000 per year would bother to ask if it were a good deal or not, but this dentist did. Here’s the statistics of this actual real life practice and that offer he received.

Price Offered 120% of gross, cash at closing
Five years of commission at $350,000 per year
Stock
Total Revenues

$4,200,000
$1,750,000
$250,000
$6,200,000

So what is there to think about? Just grab the money and run, right? But on the advice of his sage accountant, he called me and asked, “Earl is this really a good deal for me?” I told him it depends. Compared to what? Comparing this delicious offer to an alternative option, that of keeping his practice for the next five years and then selling it for $2,900,000 or 75% of his gross to a buyer who wouldn’t require him to stay on could have its advantages. And he could retire. Now let’s take a look at this seemingly less attractive option.

Practice Price 75% of gross, cash at closing
Five years practice net income
Total Revenues

$2,900,000
$6,900,000
$9,800,000

It appears that this alternative would net the seller $3,600,000 more than that fantastic offer. Now I do realize that an extra $3,600,000 may not mean a lot to some dentists, but for those it does, we should understand how the difference came about. It’s obvious that the sale price in the wait-to-sell option is considerably lower, however the seller earns over $5,000,000 more net income by working for himself instead of someone else. This owner currently nets 54% of his personal (not the gross) production and the buyer’s offer was only 15%, providing they did not load him up with extra work from new managed care plans, which would make that percentage even lower.

There are great bragging rights by selling your practice for 120% of gross, but understand that it is the seller paying that price, not the buyer. By the way, these results are consistent with practically any size practice, not just this mega practice.

So the takeaway from this little story is don’t be flattered by high price offers and bamboozled by terrible terms. It’s always a good idea to seek expert guidance in reviewing critical options before finding out the hard way that price is not always what it’s cracked up to be. Remember that sellers walk away with the bottom line, not the top one.


ADS South

Testimonial from a Satistfied Dentist

"ADS South, has helped us with two practice transitions in the past three years. Both have been handled with the care and expertise needed for these specialized business deals. Dr. Douglas has complete, easy to understand analyses for each step of the process. His experience in this field has allowed us to develop a practice that makes our future very bright. I would not make a move in this area without consulting him first."

Daniel D. Phelps, DDS