This is a burning question in the minds of orthodontists. We used to think that we knew the answer, depending on only a handful of variables. In the past all you really needed to know to value a practice were the size, overhead, location, growth curve, overtime patients, new patient flow, number of patients in recall, local demographics, paid in full percentage, collection percentage, percentage of Medicaid and condition of the physical plant and equipment. I know many will tell you it’s more complicated that than but I’ll stick to my guns having seen hundreds of deals. Things have changed some when it comes to practice transitions but this has happened rather slowly. Thirteen years ago (when I got out of school) it was a buyer’s market meaning that there were more sellers than buyers so the average practice was sold for about 75% of gross collections assuming the above factors were WNL. As an aside I’ll also tell you that there were a lot more people looking for associates than there were doctors to hire! Anyway, the economic upheaval of 2008 changed all that and these days it’s definitely a seller’s market… but for the “average” orthodontic practice**, not as much has changed as one might think when it comes to transitions meaning that a practice sells for between 80% and 110% of gross. Don’t get me wrong, that’s significant money and likely important to your retirement planning** but given all the change in the orthodontic profession how can you be sure of what your practice WILL be worth? I can’t say for sure either, obviously, but we can explore what is going on in an attempt to help you prepare so you get maximum value.
- DSOs and Private Equity are currently on a buying binge – I’ve seen more action in the US and Canadian orthodontic markets when it comes to acquisition and consolidation in the last 6 months than I have in the prior 3 years. Groups are forming, groups are expanding and my friends and I get consulting requests every other week from people with money looking to get in the game. I’ve also talked to several friends who are connecting with PE to form corps and roll up practices. The good news is the prices they are paying for practices are better than I’ve ever seen by far! Another new development that I know for a fact is that owner/operator practices collecting 3-6 million are now being offered substantial multiples of their profit with only 3 year commitments to stay in the practice. This was not the case for practices this size just months ago. Also I’m hearing that it’s now possible to roll up several smaller practices in a given geographic area into a bundle and sell for a multiple even if there is no uniform business platform or consolidated leadership. I’m looking into this to get details but if it’s true it’s unprecedented to the point of being an unforeseen windfall for the “average” 1.2 MM practice owner.
- Prices for orthodontic treatment in all but the most remote areas are falling. It’s a fact. This doesn’t mean your collections need to fall and/or your overhead needs to rise. It does mean that as orthodontic treatment becomes more affordable, more people will want it. If you can get your head right and figure out how to give consumers what they want on their terms then you’ll thrive proportionately. It follows that if you have such a practice now and in the future, it will be worth more than the traditional practice.
- Location, location, location! Practices in high demand locations will demand top dollar… until they don’t. At some point the saturation level will overcome the desire to live in a cool place. It’s a good idea to sell before that happens.
- Extended financing means that more value is held in the practice. What’s more valuable to a buyer, a practice that has 100 percent paid in full cases or 100 percent extended financing? Simple answer right? 100 percent either way is not likely but the more good AR a practice has, the more valuable it is to a buyer. Apply this logic to your practice now and in the future.
- The awesome, progressive owner/operator will ALWAYS have all the market share they want no matter how many DSOs or PE groups there are in your area, if you have your head right, a great attitude, a willingness to work and a permanent smile, you’ll be fine. I know lots of people who are doing incredible numbers in saturated cities in saturated states in the same shopping center as 3 other orthodontists, 2 GPs and a pedo who are also offering orthodontics. This kind of practice will make more many than you can spend and save during your career and be very valuable to the right, charismatic buyer when the time comes.
- What you are selling is vital. As Ackerman mentioned a while back, if train companies had thought of themselves as selling travel rather than selling train tickets we’d be buying our airline tickets from Amtrak. We are in the cosmetic enhancement business and that’s mostly to do with tooth alignment. This is not the traditional orthodontist mantra I know but that needs to change. Practices who sell what consumers want will be valuable and those who do not will not. Straight teeth are what people want. STRAIGHER teeth even… GIVE THE PEOPLE WHAT THEY WANT!
- What happens when the DSOs and PE groups are done buying practices? What is your practice worth when their appetite is satiated? Well it depends on all the factors above factors. There will ALWAYS be a place for an awesome owner/operator who has their head right but beyond that, all bets are off. Given this eventuality one might consider selling now, taking some money off the table, doing 3-5 years with the buyers and then opening another practice elsewhere. The two big advantages being that you put significant money away for retirement now so it can grow AND when you build your new practice you can do so with an eye on matching your philosophy and physical plant to what consumers WANT instead of what we are set up to sell in traditional practice.
Oh and before you decide you’re awesome and think you’re good to go now and in the future, be sure to check your results and ask your team and ask some patients who didn’t start with you about your awesomeness. I’m not saying you’re not awesome just that you better be damn sure you are before relying on that factor to get you through. The good news is that if you’re open minded enough to find your weaknesses then you can work on them and change. I do it every single day and I still have a long way to go!
** As a very long winded aside… the JCO states that an average orthodontic practice is somewhere around 1.2 million in collections annually but we must remember a few things about surveys of orthodontists. 1) Orthodontists (like all human beings) tend to round up when answering surveys and when one rounds up on every question of a survey the effect on the results is at least additive if not multiplicative. 2) Most surveys of orthodontists are very long and tedious and few people are willing to fill them out. 3) Those orthodontists who are most proud of their results will tend to be the ones who take the time and effort and suffer the introspection of filling out a survey. 4) Those who have a vested interest in any given survey will fill it out for sure and ask their friends (who are probably like-minded) to fill the survey out as a personal favor. I’m not saying the survey is not valuable, I’m just saying we should take this and every other survey of this kind with a grain of salt. All that being said, based on what I’ve seen out in the wild I’d guess the median orthodontic practice does +/- $800,000.00 in collections annually and that the outliers tend to skew the average. If the average practitioner practices 30 years at this level (some years higher and some lower) with a 60% overhead then the average orthodontic practice owner should earn, after expenses $320,000.00. This puts them in the 97th percentile for US households! PLUS the business owner gets to pay for many expenses before taxes so their income is effectively much higher than someone earning a $320,000 annual salary. Let’s assume the doctor pays an effective tax rate of 30%. This means the owner doctor will take home $224,000.00 annually after taxes to pay for housing, food, cars, phones (nope cars and phones are probably business expenses), the kids’ school and all that. But we forgot something – retirement planning. Assuming the doctor puts away 10% of earnings before taxes or $32,000.00 for 30 years, the take home pay would be just under 200 k and if the doctor earns no interest or income from investing they will live a great lifestyle AND end up with just shy of a million dollars in the retirement account (realistically over that time period it should be double or even triple that amount even invested conservatively over 30 years). But only if the doctor puts away money religiously for the long term (I’m afraid many do not). Now let’s say that the doctor ends up with 2.5 million in the bank (split the difference between 2x and 3x the cash put into retirement) and ask how long that will last at a 200 k a year burn rate during retirement when the doctor doesn’t own a business to run expenses through? Well to get 200 k you’ll need to take 300 k out of your tax deferred investment vehicle cuz you gotta pay Uncle Sam 35% (or probably more). So 2.5 MM/300k = 8.33 years of living expenses. That doesn’t sound good to you? You will live on less in retirement? Ok so let’s be optimistic and say you’ll scrimp and make it 12 years of living expenses but if you start at age 30 and retire at age 60 that means you need to die by age 72 (which happens to fall between the median lifespan of men and women so you have that going for you). But what happens if the market is down during the time you want to retire or what happens if you get disabled? My point being that doctors need to make a plan for this and realize that your practice sale could make the difference for you IF it’s worth anything when you’re ready to retire. Obviously if your income or savings rate or number of years you save is different, your results will differ depending on the math but this outline should act as a decent framework to help you figure that out.