What’s Your Practice Really Worth? – Ep. 296

Welcome to the Accumulating Wealth podcast. I’m Christy Ratcliff. And I’m Judson Crawford. We’re CPAs, wealth advisors, and partners at Cain Watters and Associates, a financial services firm here to help business owners navigate the decisions they face every day. And if you can’t tell Hunter is not with me today, but I’ve got my sidekick Christy, as you can also tell. 

And no, we’re not talking about divorce again. But today we are talking about overhead and how it directly impacts the value of your practice. So, Christy’s back to help me out because this number can cause a massive swing in what the business is worth and frankly, what your retirement plan looks like. So, let’s go. Let’s do it. 

Okay, Christy, so if you’re listening to this then it’s likely that the podcast we just did together with Hunter about divorce valuations was just released. And as we were going through that, we started to talk about just the businesses that you value and talking about kind of the swings in those values. 

And so, we went back and looked at some numbers and thought, “You know what? This is valuable enough that we should talk about it.” Yeah. I mean, this is my life day after day. What practices are worth, what people think practices are worth. And there can be a disconnect in those two. So, we’ll go back to the facts. 

So basically, what you’re saying is we’re validating your life by doing a podcast on what you do every day. Oh, it makes me feel so good. This has to feel good. So good. This has to feel good. 

Okay, so what we’ve done, guys and again if you have only listened to Christy and you don’t know who she is she’s the managing partner for NDP Transitions and 7 Pillars, which basically are two partner companies that deal with all of our transitions that our clients go through, whether that be doctor to doctor or whether that be to a private equity or DSO. Correct. Okay? 

And so, Christy is a certified valuation analyst, a CVA. And so, she does know this stuff inside and out. And if you have never listened to Christy or Transition Talk or seen her speak on the road, you’re about to be blessed with some wisdom, okay? Oh, man. High expectations. You have very high expectations. 

Okay, so what we did is we went back to valuations that you and your team actually have done, right? Yes. We’re not taking averages from somebody else. We are looking back, and we did basically back through 2024. Yep. Okay? So valuations done from basically yesterday through 2024. 

And we just broke these down for our three biggest segments, which happen to be GPs, general practitioners, orthodontists and pediatric dentists. And we can mention our other surgical parts because we do that as well. But just because those are the biggest numbers, we kind of broke those down. Yep. Okay? 

So, one of the reasons we got into this is when we have clients that come in and we’re not facing a situation like an actual sale or a divorce, we talk about practice valuations, but a lot of times we do so in very roundabout ways. Okay? 

And what that often ends up looking like is, “You know what? You’re an orthodontist, and so our average orthodontist sells for 80% to 85% of collections. We’re going to put your practice valuation in your personal financial statement as 80% of your last year of collections.” And we move on. And I think that’s, for the most part, okay. Yeah. Right? 

I mean, I think for planning purposes, I mean, for some of your clients, we’re talking 10, 15, 20 years out It’s a huge part of your retirement, so not plugging something in would be a mistake. That’s right. 

But what that average what we know is that is just an average. And what we have empirical data on is that average doesn’t swing by just a couple percent. No. Right? That average swings by a lot more than that, and we’re going to discuss that. 

So, let’s take a step back here and talk a little bit about when I am going to sell my house, they go out and they look at a bunch of houses that are closer to mine, and they say, “These houses valued at this,” so your house values at that. Yep. Is that how you basically have to do it with these practices? 

No. I mean, I wish. It probably would make it easier. Yeah. But no. I mean, unfortunately, if most practices are private practices. All these valuations we’re talking about today are doctor-to-doctor sales, so they’re private valuations. So there’s no one database like the MLS here, where all house sales are listed. 

So, we don’t really have the transparency. Even if we have the value something sold at, we don’t know what, how that practice differs from the one we’re looking at, right? And so those market comps are way less reliable. And so we don’t do that. What we look at is cash flow and risk, and that’s how we judge the valuation of each one. 

So, when you say there’s a wild swing or a greater swing, it’s because the cash flow and the risk factors of a practice, a GP practice in California, are probably very different than a similar practice in Virginia, right? And so we really have to look at those on an individual basis. 

Okay. So, cash flow. And if you’ve ever been to our practice transition seminar, which by the way happens twice a year, and you should go to it if you want to know how to value a practice or bring an associate in. You’ll hear me. You will hear Christy. Talking about the cash flow of a practice, when we boil it down to what you guys are looking at, what cash flow are you looking at in a practice? 

We are looking at the cash flow, the average cash flow typically of the last two to three years, and we are calculating your overhead or profit based on not running anything through, right? So not your one-time expenses, not your personal expenses, not your discretionary expenses, but your true operating cost of running your business over that time period. 

Okay. Producer Erin just threw her phone at me. I didn’t do anything, but I guess I deserved it. So, what we’re saying here is that you’re adding back… So, when you look at a valuation, just talk about this really quickly, when we take a client’s financials, typically we like to break it down where it’s like collections, direct cost, fixed cost, net income, and then we try to pull out a lot of the doctor costs. But for you guys, you have to have to get a lot more granular, right? 

Oh, absolutely. I mean, a good financial- the Cain Watters financials has that doctor section there at the bottom. But we know if we look through meals and entertainment or office supplies or even your salary cost, right? You might have your kids or your spouse on the payroll. All of those costs are truly not operational, right? 

So, we will dive through all of those upper expenses that may be in your more fixed indirect section, and we’re going to pull those out to kind of get to that next level of true overhead of the practice. 

So that is one of the things that takes a lot of time when Christy and her team do that, is they are getting really granular and it is to your benefit, right? Because they’re getting to the actual cost of doing the dentistry in a practice. 

Okay, and so what we end up getting to is sort of the net income. So here we’ve got three different types of practices that we’re going to focus on today. Let’s talk a little bit about what kind of profit we’re looking at. And by the way, these numbers are all supported not only by- what we’re talking about today is just the averages that we see in our actual valuations done. These track amazingly well with our Ortho Report, our Pediatric Report, and our How Does Your Practice Compare? Report. So, tell me a little bit about what we see when we look at these types of practices. 

Yeah. When we looked at this group of practices, right? And I’ll also say the majority of these are partnerships. But these percentages really would kind of continue on– the percentages are the percentages. But we looked at ortho practices, like you said, pediatric and GPs. If we focus on ortho, the average profit for our ortho practices that we did valuations on during this time period was about 43%. And that resulted, right? 

But that span was roughly in between 30% as a low and 51% as a high, right? So, if we talk about being able to put just, like you said, “Hey, 80% in collections. That’s what the value of a practice is,” that is not true for the 30% low and the 51% high. Those two practices, with those varying profit margins, are going to have very different values, okay? 

But the average of the ones we looked at was about 43%. That resulted in an average valuation as a percentage of collections of 84%, okay? So right in line with what you would – standard put in your consult book. But the range that we saw based on those two profits, right, 30% low, 51% high of net profit resulted in a valuation anywhere from 64% of collections to 96%, okay? 

And so, if you’re an ortho listening, if I gave you a valuation of 64%, you would probably be very shocked by that because you’ve heard it should be in the 80% to 90% simply because you’re an ortho. And so, I think for me, what I know about this is that your overhead matters, right? 

And the low overhead practices are going to get those higher valuations. And the one that was 64%, I don’t have all the individual stats, but my gut is that the one that was lower had a higher overhead percentage than the others that had the higher value. 

Yeah, and I think, we talk about overhead a lot. And look, sometimes even though we all would like to make more money, sometimes it becomes less of a priority for a practice where statistically they may have a lower overhead than their peers, but it works financially for them. 

And so, it’s kind of like, what’s not broke, don’t fix it. Yep. But what we’re talking about here when we’re talking about a range of valuations that has a swing of 34%, we’re talking about real dollars that will affect your financial plan long term. And so, we’ll come back to what those differences are. 

Let’s move on to pediatrics. So, we talked a little bit about the ranges. What are our averages for pediatrics and then, averages again in valuations? 

Yeah. So, the average profit for this group of practices was about 53%, right? So the inverse of that, that 47% overhead. And the value as a percentage of collections was about 79%. 

So lower than ortho, but still pretty high. And if the range of profit margin was anywhere from 38% to 62%, so again, wide range of profitability in this group of practices. And that resulted in valuations of about 64% of collections to, again, 98% of collections on the high end. 

So again, I have heard everything. I take calls all the time, and I hear that a pediatric practice shouldn’t value at over 75% of collections. It has Medicare except it doesn’t matter, right? It matters, but it is primarily a result of that change in overhead. 

If we look at the GP practices, the average profit there was about 47%. So again, kind of inverse is that overhead, and the value was around 78% was that value. So again, if we look at those GPs clearly coming in slightly lower, but they’re all pretty in line, right? When we look at those overheads, all those overheads are kind of roughly in that same range, which kind of puts that value in the same range as well. 

Yeah. Now, when we talk about some of these numbers I want to give a little bit of warning in advance. We’re going to be talking about average collections in these practices that are going to sound really high, okay? And a lot of the reason for that is that we are– A lot of the transitions that you do are going from multi-doctor to higher multi-doctor practices right?  

We obviously do a lot of valuations for a one-doctor practice individually, but we do a lot more that are like one-doctor going to two, two-doctor going to three, and so forth, right? Yeah. So we’re talking about multi-doctor practices here. But these percentages, they really stay true whether you’re a one-doctor practice or a five-doctor practice. Yep. Okay? 

 So, our collection ranges, interestingly enough, on all three of these individual types of practices were very close. Right? They basically range from pediatric at $3.75 million up to the average GP valued at almost $4 million, $3.98 million. Okay?  

And we talked about the difference in net income, all right? Being again, the lowest in ortho and then the highest in pediatrics, all right? Well, it’s interesting though because even though ortho has the lowest overhead, they have the highest value as a percentage of collections. 

So, I think we need to talk about that a little bit because what we’re saying is, “hey, cash flow is everything in evaluation, but hey, ortho, you make actually less money than your peers, but you’re going to get more for your business.” 

Yeah. So, I mean, the common answer, and kind of from a “what exists in the market,” right? The supply and demand, there’s typically less orthodontic practices for sale, and so they’ll value more because there’s more buyers looking. I think really what’s driving this though is really contracts receivable. It’s the one unique thing that ortho has that no other specialty has. It is that amount that exists that is for future billing, right? 

So, if I buy and buy into this ortho practice, I know that there’s a contract receivable balance that I’m going to get over the next 18, 24, 36 months. And that adds extra value. That’s something that doesn’t exist in any other financials. 

It’s literally like you’re buying a savings account with it, right? Work still has to be done. Patients have to be seen. But as long as you do those things, that money is almost guaranteed to come in. The best example of when we saw this was during the pandemic. When our GP and pediatric and oral surgery and perio practices shut down, the cash flow essentially stopped. Yep. Right? 

When our ortho practices stopped down, their collections went down a little bit, but they were still collecting money throughout that entire shutdown. Yeah, absolutely. And that’s because of contracts receivable. 100%. 

And I think that this is where I think if you’re an orthodontic practice owner, you have to understand that the value- the premium value that an orthodontic practice can get is a result of a healthy orthodontic practice with a good contracts receivable and a healthy overhead, right? 

If I have an orthodontic practice that has- I have all prepaids, my production is declining, that practice isn’t going to get the premium that you expect to get from others. So, I really think that’s important to understand because there are certainly companies out there and individuals that just assume because it’s ortho, this high premium exists. And to be honest, you’re going to have a hard time finding a buyer because you’re going to have a hard time finding a bank that’s going to want to do that. 

So, we talked about the high end. The lowest as a percentage was actually- and this is lowest as a percentage as far as net profit and also obviously then therefore as a percentage, the value as a percentage of collections was our GP. 

So, let’s talk a little bit about again, maybe outside of just average profit, why is it that, maybe a GP practice is a little bit- why they may be a little bit lower? Is it just net profit, or is it also because there’s more GPs? You know, what are the other factors that go into it? 

Yeah, I think the GP is probably there’s a wider range of the type of general practice, right? We have some general practices that are really all doctor production. Maybe they’re more cosmetic in nature. Those present more risk than a heavy hygiene practice. Maybe it’s all one doctor. One doctor’s like a super producer. The others aren’t as much. 

So, I think when you look at a GP and why there might be variance, it has to do with those other risk factors outside of profit. It’s more maybe production mix or where it’s located or the equipment and kind of technology. Those other factors are probably what is going to pull that down. And I think that average is lower simply because there’s a wider range of GPs. Yep. 

So then as we’ve talked about or as you kind of went over, depending on what type of practice you are, in both ortho and GP, there was about a 30% of collections spread between valuation. Then in GP, it was actually 40% spread. That’s a large number. Right? So again, when we’re talking about valuations that we’re looking at, let’s just- our average valuation, let’s just round it off to $3 million. We’re talking about basically somewhere between $1.2 and $1.3 million difference on a valuation. 

Yeah. It’s a huge difference, especially if we talk about that asset at the end versus retirement, right? So, when I look at this it’s, is it going to be easy to get your practice from a 60% overhead to a 40% overhead? Sure, yeah. That’s probably really challenging. But that’s not what I think makes the difference, right? 

It’s the 60% to the 55%. Like, every percentage of difference that you can lower your overhead, right, all things else being equal, is a huge amount from a valuation perspective to you. And again, we’re talking about these big numbers, but that delta and that magnitude is the same even for that one-doctor practice that’s maybe doing $1.5 million, right? Like, that delta is still just as valuable as this is to these bigger practices. 

That’s right. And I think that again the takeaway from this is that overhead matters in every situation from cash flow, but we just want our clients to understand what the true value of their practice really is. 

And one thing we should note here, all of the valuations that we’re discussing in this context today, they’re doctor-to-doctor sales. Yes. Right? Doctor to doctor.  

So, again, we talked about earlier that you’re the managing partner over two different businesses. These are doctor to doctor Would you say, without getting into all the nuts and bolts because it’s very complicated, is this the same way it’s valued if you were looking at a sale to private equity? 

They’re looking at cash flow. They call it EBITDA, but they’re looking at cash flow, and they’re also looking at risk, right? The difference in those valuations, clearly they’re larger numbers but they know that they have you as an owner, right? That are going to be there. When we’re talking doctor to doctor in a partnership, yes, as the doctor’s saying, but you’re really relying on individuals, and so there’s a bigger risk there, and those valuations are typically lower. 

So, there’s other factors that go into it, but at the end of the day, the cash flow or EBITDA of your practice matters, and then the risk of that goes along with it. So yeah, I mean, I think for me it’s cash flow matters, but being educated at any point in your career about what the expectation would be from a valuation of your practice because as life happens, whether it’s divorce or something else or you just, are wanting to sell it, understanding and knowing before you go into a valuation process and not just hearing, 85%, 75% of collections because yours could vary dramatically on either side of that. And so that shock is probably one of the harder things for people to get over. 

So if somebody is preparing themselves for getting their practice valued or they want to understand more about what their practice value is, what are some of the tips you would say, like, as I go into this valuation or how can maybe I help myself out if I know, hey, I’m bringing in this associate next year, so I know that in a couple years I’m going to have a value of my practice. What are some of the things I should be thinking about? 

If you don’t have a good handle on your accounting, if your financials aren’t clean, that’s the number one thing you need to do, right? Valuation, we’re going to be looking back one, two, three years, and so having good, clean financials that you understand is critical. 

If there’s any meat on the bone there from an overhead perspective, if you’re not a member of an ELITE or somewhere where you can kind of try to trim. Even if you don’t have a large category that’s out of line, those half percents and one percents you can gain as you look down your financials is critical. 

So, I would say if you’re two years down the road, 1.) have a plan, understand what that looks like, but then 2.) really look at your numbers and make sure you understand your business and start educating yourself on what that valuation process looks like. 

Another thing that a lot of our clients have as part of their bigger picture is many of our clients own their dental building. Yep. Right? And many times, if you are a- especially if you’re a one-doctor practice or if you went in with your partner and bought this building you may have set your rent based on maybe some tax planning, maybe on how much the ended debt amount is. 

What are some of the factors to think about if you’re going into this sale, whether you want to sell the building or not, what are some of the things you may need to know or look into related to your building? 

Absolutely. If you own your building and you own your practice 100%, when you pay yourself rent, it’s just one pocket to the next. When you bring on a new partner and let’s say they don’t buy your building, now that practice is paying you rent, but you don’t own 100% of that practice. And so what we really have to account for in the valuation, and just honestly from a fair partnership perspective, is really ensuring the rent you’re paying is fair market value. 

If you’ve never had to do that, you probably have no idea. I would suggest you ask some colleagues if they lease their building and they’re within your vicinity, what their lease rate is. You can talk to a commercial real estate agent. There are some publicly available websites you can go look at just to start understanding what a feel for that is and understanding that once you make that partnership, your mortgage may be X, but you can only charge yourself Y, right? And so that delta there sometimes is hard for people, so just starting to think about that early is important. 

Well, it’s interesting timing because tomorrow morning we’re going to have somewhere around 100 clients and associates and spouses show up at our offices tomorrow for our practice transition seminar which I mentioned earlier is something we do twice a year, and it’s something that you’re intimately involved with every time we do that. 

What are some of the things, like if I were to say, “Why should I attend this meeting?” What are some of the things that people should be attending this meeting if they’re thinking about what? 

Partnerships are a work marriage. And I think this seminar does an incredible job of talking about the various facets. Is there a business piece? How you split the money, how you make decisions kind of how the entity structure is set, 100%. Those are incredibly important. 

But there’s also the other side of the partnership, which is how are you going to work together? What’s important when you’re looking for a partner or you’re deciding to become a partner as a buyer? 

And I think this overall seminar really touches on all of those pieces and creates a roadmap because if you’ve never thought about this and you’ve never created a partnership, it can be super overwhelming. And so, I think laying out the roadmap, how it works, and I think we do a really good job of explaining why we do what we do, which is really important for you to understand. I think it’s just an incredible asset. 

Yeah, and my biggest recommendation is don’t go to this seminar too late. No. Right? You have to go early. Yeah. It is not inappropriate to go to this seminar if you haven’t even brought in that associate that you may be selling to in the future. Yeah. The knowledge there is the biggest key piece and knowing that is going to make bringing in that associate and the conversations with that associate and everything more valuable. So once again, we do that twice a year. 

Christy, also give a little bit of a shout-out. You do another podcast that talks about these transitions, right? I do. It’s called “Transition Talk”, I do it with our other partner, Charles Loretto, and we talk about all things transitions. So, you can listen to any episode. You don’t have to listen to them in order, but anything from partnerships to valuations to profit and loss to bringing in a partner to walk-away sales, we try to cover the gamut. 

Awesome. Last question, and it’s because we want to bring the hard-hitting questions to our clients on a weekly basis. Who is your favorite “Accumulating Wealth” podcast host? Junter. That’s not fair. And Hudson sounds better. Hudson sounds better. We’ve both been called Hudson way too many times to count. It’s clearly you. Not Junter. Yeah. Well, okay. Phew. Good. 

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