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Buying on Emotion: A Mistake That Can Last a Lifetime

Buying a practice is one of the most important decisions you will make in your professional life. The importance of having a true understanding of the value of the practice in which you are considering making a lifetime investment cannot be overstated. Unfortunately, in today’s market, professional performance standards for this process are often not followed. It is not unusual for a broker or their representative to tell the owner of a practice what the owner wants to hear in order to obtain the listing. If a buyer can then be enticed to pay an inflated price for the practice, the buyer may struggle for years to come to achieve adequate cash flow. Often in the excitement of finally realizing the dream of practice ownership, buyers make decisions on feelings rather than facts. Accordingly, practice transition failures are a reality today to an extent we rarely saw in the past.

Overhead, Schmoverhead
An example of what often occurs in the industry can be illustrated by a Dentaltown message board post that detailed a conversation between a prospective purchaser and a representative from a well-known brokerage company. When responding to a question from the prospective purchaser about why a practice had a significantly higher asking price than another broker’s practice (with similar collections and lower overhead), the representative is quoted as stating that their company “doesn’t take into account overhead in its algorithm when determining practice value.” When the prospective purchaser responded, “So, according to you, a practice doing a million dollars with 90% overhead and a practice doing a million dollars with 60% overhead have the same value?”, there was only silence from the representative.

Look at the Cash Flow, Not the Furnishings
Keep in mind that as a purchaser, you are primarily buying a stream of revenue, or in other words, cash flow. Sometimes as dentists, we are wooed by the newness of the equipment or the office décor. Of course, these are factors in the value of the practice; however, these tangible assets can be replaced at a small percentage of the total practice value and do not in themselves solely justify a price not supported by cash flow. In the end, value is most often a function of net income.

If you are considering purchasing a practice, we can help you avoid a lifetime mistake by providing a true valuation/appraisal or consulting on your purchase, particularly for those practices listed with no or with another transitions firm. We’ll help sort through the “feelings” and provide the facts.

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