I understand the dental practice broker’s job is to get the highest price they can for their client. As dental-specific CPAs that provide seller representation services, that is our goal as well. Apparently, the main difference is the willingness of some brokers to turn a blind eye to certain aspects of developing the asking price and ignoring facts or bad assumptions presented by the seller and/or some of their other advisors.
Just in the past month, I have had three instances where brokers have done just that AND two of the brokers are well respected in the industry. At least I had a lot of respect for them in the past…maybe not so much anymore.
The first case is a situation where the selling practice is doing around $1.35mil in collections with only $150k coming from a hygiene department. It also has a VERY low OH of approx. 45% which will normally push a practice value to the upper ends of selling prices. The brokering firm contracts out their valuation function to a valuation firm (that is what they call themselves anyway) that specializes in the dental industry. This valuation firm valued the practice at $1.45mil for this “general dentistry” practice.
Unfortunately, in my opinion, this is NOT a general dentistry practice and the valuation assumptions used for general dentistry practices should NOT be applied in this case. This is a hybrid practice, part general dentistry with collections of approx. $600k and part specialty practice with collections of over $700k. Heck, the seller even said, and I quote “We are NOT the typical GP practice, we bill at significantly higher fees and do considerably more prosthodontic and advanced services!” Yet, when I addressed my concern to the broker their reply was “as far as I know it’s a typical general dentistry practice and we don’t do practice valuations, we use __________ company for that aspect of brokering practices”. In other words, I am ignoring what the seller has said, I am ignoring the practice data, I am ignoring that the practice relies heavily on other professional referrals and the seller’s reputation…we are selling this as a general dentistry practice.
The second situation is not quite as bad, still, it has the broker turning a blind eye. The last four years of collections for this practice have NOT exceeded $1.1mil yet in the broker determination of practice value, they established first-year collections for the buyer of an exact $1.2mil and going up 5% per year over the next five years.
I asked the broker for an explanation of how they arrived at the current collections of $1.2mil, their first reply was “If you annualize the actual collections for the first six months of 2021, you’ll see they should exceed $1.2mil”. So I looked at the collections and they were $565k. Then I asked the broker how that annualized to over $1.2mil, he then replied “Well, we asked the seller to estimate their total 2021 collections and they believe it will be $1.2mil. The seller said they always have an increase towards the end of the year for patients wanting to use their benefits”. I asked the broker about the decrease in summer collections that most practices experience and the month of Sucktember (as many docs across the country call it) and of course the last two months of the year with all the holidays and office closures. Their only reply was “We have to go with what the seller expects”. So here is a practice that has NEVER collected more than $1.1mil in the past four years that the broker is willing to accept the assumption that the practice will collect $1.2mil in 2021.
The last situation is the well-known Delta Dental Premier issue with sellers that participate with Delta Dental Premier and NOT with Delta Dental’s regular PPO platform. It has been widely known for at least ten years now that in most parts of the country, if the seller is a Delta Premier ONLY provider, Delta will only allow the buyer to participate in the Premier platform IF they participate in their regular PPO platform as well. If the practice has a lot of regular Delta PPO patients, the buyer will have to accept the reimbursement from Delta for the procedures whereas the seller was able to balance bill the patient since the seller was NOT in-network with Delta’s regular PPO platform.
We inquired about their regular Delta PPO patient base, and we were told it was about 25% of the practice and the practice was collecting around $1.2mil. So we roughly estimated that the buyer would likely take a 35% hit on at least $300k in collections, approximately a $100k reduction in collections immediately after closing. When I asked the broker (and this broker has been brokering practices since the 1980s) if they had considered this revenue reduction in their determination of the asking price they responded with “We don’t think it’s going to be an issue. We believe another buyer will be able to perform additional procedures that will generate collections to offset any possible decline in collections for other reasons”. Really? Now, admittedly they were not necessarily turning a blind eye, they just simply refused to consider the facts in this case and overvalue the practice and NOT inform the seller that their Delta Premier issue will present a problem with any educated buyer who cannot be a Delta premier provider when they buy the practice.
This is what young buyers are facing these days and more importantly, why buyers need to engage experienced professionals to represent them in these situations. It is still a BUYERS BEWARE era even more so now than ever.
Happy practice hunting!
About Tim Lott
Tim Lott, CPA, CVA, has decades of experience working with dentists at all stages of their careers. He is a regular speaker at study clubs, societies, and dental schools. Tim is a frequent participant and a moderator of Dentaltown.com. You can reach Tim at email@example.com or any of the other dental partners/principals at (800)772-1065 or firstname.lastname@example.org