THE MAXIMUM SALE PRICE FOR YOUR PRACTICE

3 Things Determine It

There are some other factors that come into play but in most cases, for the most part, the maximum price that a seller can get for his / her practice is determined by:

1. The practice’s cashflow;
2. The bank utilized by the buyer; and,
3. The buyer him / herself.

CASHFLOW:  Cashflow affects the potential sale price in two ways.

1. Buyer’s Income.  The higher the purchase price is, the higher the buyer’s annual purchase loan payments will be.  Increases in purchase loan payments decrease the pre-tax cashflow income that a buyer can derive from a practice.  A sale price cannot be so high that it results in the buyer’s pre-tax cashflow income potential dropping below a level that a buyer would reasonably expect to receive, given the level of annual collections in the practice.  In other words, most buyers will not be interested in a practice unless its potential pre-tax cashflow profit is a reasonably expected percentage of the practice’s annual collections.
2. Banks’ Cashflow Analysis.  When deciding the amount that they will loan for a practice purchase, part of banks’ decision processes is the cashflow analysis that they perform.  The cashflow potential from the practice must reasonably meet the buyer’s practice purchase loan payments, living expenses, student loan payments if applicable, payment on credit cards, and payments on the buyer’s current loans (e.g. cars, homes), and the cashflow must do so with a comfortable margin of error.  Again, the higher the purchase price is, the greater the annual purchase loan payments, and therefore the amount of cashflow left for the buyer to meet other expenses is reduced.  Cashflow sets an upper limit on what a bank will loan.

​BANKS:  All banks are not alike.  Some banks may not want to make practice purchase loans due to the high percentage of practice value that is intangible, and therefore of little collateral value to a bank.  Some banks will want to do practice purchase loans but may make the purchase impossible or undesirable for the buyer because of the bank’s requirements to do the loan.  Requirements that can derail a practice sale can include: (i) requiring buyers to have saved a lot of money (liquidity requirements); (ii) large cash injections (in effect down-payments); or, (iii) high interest rates, among other possible requirements.  Leading your buyer to the correct bank is critical.  The correct loan terms, from a bank, may be necessary for your buyer to be able to pay full value for your practice.

​CORRECT BUYER:  There are buyers who understand the value of dental practices.  There are buyers who don’t.  There are buyers who are willing to pay the full value of dental practices.  There are buyers who won’t.  There are buyers who have the credit history, financial condition, and experience required to get a purchase loan in an amount equal to the full value of dental practices.  There are buyers that don’t.  It is not enough to simply find an interested buyer for your practice.  You must find a qualified buyer, one who understands the value of your practice, is willing to pay that value, and who can qualify for the bank loan required to pay that price.    

​CONCLUSION:  When you start to sell your practice, obtain experienced guidance and help in one of two ways:

1. Dental Practice Broker – to handle your sale process for you; or,
2. Dental Practice Sale Consultant – to guide you, if you want to sell your practice yourself without using a practice broker.

 
If you choose a practice broker or a practice sale consultant, that has the right experience and knowledge, either one can: (i) perform a cashflow analysis on your practice, determine its value and maximum potential sale price; (ii) guide you and your buyer to the right banks; and, (iii) either seek the correct buyer for your practice, or guide you in how to seek that buyer and qualify the buyer at the beginning of your interaction with the buyer.   
 

If you have questions comments, click here to contact Dr. Stollings