Factors that Affect the Value of Your Practice

What’s Your Practice’s Hygiene Production Rate?

Quite regularly, we get asked this one question: “The annual billing of my practice is ‘this’, what do you think the value of my practice is?” Most of the time, I can’t help but smile and return the question with another question; “What do you think is the value of your practice?”

Often the answer is either way too high, or slightly lower, depending on the level of knowledge of the doctor. Some are up to date with the market, and some have no idea about the actual value. Those who do not know the market well will typically feel surprised that we feel the value is higher than what they have in mind. The problem though, is with those who expect ridiculously higher dollar value than what the market or financial viability dictates.

In the next few articles, I will try to explain the logic behind each factor that affects the value of your practice. Value is directly related to net income after all expenses paid. If we have two practices and each does a million dollars in production, this does not mean they both have same value. If Practice 1 nets the owner $300,000 while practice 2 nets its owner $375,000, then Practice 2 is without a doubt more valuable, and will be more attractive to potential buyers.

Hygiene: A more influential factor than one may think

Many do not know that hygiene production is one of the most influential factors in determining the value of a practice. The higher the hygiene production is, the more valuable and attractive the practice would be. An average practice would have a hygiene production rate at around 28% to 33% of the total office production. We have evaluated practices where hygiene production was as low as 18%, and some were as high as 58% (WOW).

Usually a practice with hygiene production above 40% is considered a big plus for potential buyers, and a major driver of the value of the practice. This rate reflects highly compliant and well-educated patient base, which also means that such a practice can generate income even when the owner is away on vacation. It also means that the practice schedule is booked for several months to come; typically 4-6 months – providing continuous stability for the new owner. As the owner changes, usually the hygiene team remains employed by the new owner. Thus, minimal attrition would result, and the hygienists would most likely retain same production levels.

Higher hygiene production = More opportunity for growth

Recently, we sold a practice where the total production was $950,000 and selling price was $1.8M. Why? Well, hygiene production was almost 56% of total production. The new owner will have a continued income stream, allowing him to add more dental services and procedures that were previously referred out. Thus, the practice has better growth potential and a continued increase in value.

A practice where the hygiene production is below 25% is a reflection of poorly educated and non-compliant patient base. It also reflects that since the dentist’s production is around 75% of the total production, then a new owner may not be able to sustain high billing per patient like the current owner is. It could be the current owner performing many high-end or complicated procedures that cannot be replicated by the new owner.

If you own a practice with a hygiene production rate below 30%, I highly suggest for you to look at ways to change that. Better patient education, more recall compliance and better staff training could all result in better hygiene – thus increasing the value of your practice. A practice with low hygiene production is unattractive to investor dentist – diminishing the potential for high multiple offers. Why? Dental production is costlier than hygiene production. An investor dentist has to pay the associates between 40-45% of their production, while paying hygienists is usually about 25-28% of their production. It’s easy to see how much more profitable a high hygiene production office is compared to a low one.

In our next blog post, we will discuss the effect of your “lease” on the value of your practice.

Alan Rustom