This is a very common question we get with certain practice transitions and many believe the answer is easy, NO! Sometimes I’d agree and other times I would flatly disagree. Unfortunately, it depends on what the potential is and who’s selling it. I believe there are two types of potential when it comes to practice and the sale of that practice.
The first type of potential is the bad kind. It’s the potential that’s usually being sold by the broker, advisor or practice seller. It’s the potential THEY tell you about that’s there based on THEIR desire to SELL you the practice. There’s generally no support or verification for this potential and I’ve seen\heard many examples and it comes in many different forms. For example:
- A set of projections for the next ten years with a static 3, 5, 7 or 10% expected growth in revenue that elevates the asking price
- A comment about the neighborhood, like “this area has so much potential new patient growth”
- A comment about proper marketing strategies that need to be deployed like “once you own the practice and begin marketing, you’ll see all kinds of growth”
- Suggestions to add another day or two in the office to see all kinds of growth
- Suggestions to review the overhead and decrease it by 10-15% to realize all kinds of extra profits
- Suggestions to reduce employee hours or reduce their compensation and\or benefits to see additional profits
- Suggestions that the seller refers out everything or is simply watching and waiting so that there’s a ton of dentistry to be done
This is the kind of potential that the buyer needs to ignore in most cases and NOT get caught up in the sales pitch from the individual trying to SELL you something. You should NEVER pay a premium on a practice when you’re being sold on this type of potential.
The second type of potential is the good kind. It’s the potential that YOU identify within the practice based on your assessment of the performance of the practice and its related attributes. It’s the kind of potential that’s more easily supported from your assessment of the opportunity from specific areas YOU can improve upon based upon YOUR skillset and the practice performance indicators. Here are some examples that some of our buyers have identified during their assessment:
- Based on their chart audit\review, they identified additional procedures they can easily add that the seller didn’t do
- Based on their chart audit\review, they identified an increase in certain procedures the seller could do and chose not to do
- They identified areas of patient care that were weak in the practice that needed to be strengthened such as additional perio procedures by the hygienists
- They found that the practice hadn’t kept up with procedure fees relevant to the market
- They identified areas of overhead that simply weren’t being monitored by the seller that would allow for a reduction in expenses in those areas
- They recognized that the practice hadn’t done any marketing in an area with great demographics so that an increase in new patient flow was highly likely
- They identified opportunities to expand the space in the future to help capture more new patients based on the area demographics
This is the kind of potential that the buyer should be able to recognize when doing a proper practice performance assessment. This is the type of potential that the smart buyer will factor into their price assessment and it’s the kind of potential that can warrant a premium on the practice price.
In summary, know the type of potential you need to consider when making an offer on a practice and understand that when someone says, “you should never pay for potential”, hopefully, they’re talking about the bad kind of potential. The smart buyer will know how much to pay for the good kind of potential.