A Practices are valued using a number of different factors which are basically a function of cash flow, profitability and market comparisons. In general terms the cost of acquiring a practice should be repaid (along with interest) out of profits in about a 5 year period at the highest personal tax rate and in about a 3 year period at the current Ontario corporate rate. Profit is considered to be the net profit after deducting for all producers an amount for “Professional Compensation” equal to what an associate would be paid.

Market factors can also influence the value of a practice. For example, practices located in Toronto are currently being sold at a premium because of the high demand created by doctors wanting to live in that area.

The big advantage of buying patients from another practitioner is that you are buying 100% of the revenue and 50% to 60% of the expenses so the net return to you is much greater than to someone who buys the same practice and operates it as a solo practice. How much you should actually pay for a patient base depends on a number of factors such as the following:

1. How far apart are the two practices and how likely is it that the patients will go to your (the new) practice?
2. Is the Vendor prepared to work through some transitional period?
3. Is there any dentistry left to do?
4. Is there a strategy in place to convert patients to both you and hygiene if necessary?

You should have your accountant or broker prepare an “Incremental Cash Flow Analysis” assuming several different rates of attrition to determine what an appropriate price would be. If you can count on most of the patients moving to your practice (more likely if the vendor will work in your practice for a year) the value of those patients will usually be greater than the appraised value of the vendor’s practice.

There are many factors that need to be considered when making this decision. Here are some of the factors that need to be considered:

1. Can you afford to sell your practice?
2. Are you healthy enough to continue to provide good care to your patient?
3. Are you tired of doing dentistry?
4. Do you enjoy dentistry but are tired of the management? (You may be able to sell and stay on as an associate)
5. You may choose to sell your practice while values are high rather than wait until all the Baby Boomers start to sell which will drive values down.

Deciding to sell your practice is a decision that you should make with input from your spouse, your accountant and/or financial planner and any other significant advisors.

As a new graduate you need to ask yourself these questions:

1. Are you confident in your ability to manage a practice?
2. Can you produce enough to pay yourself 40% of your own production and pay everything else including your acquisition debt, from the balance of the practice production?
3. If you have the clinical and management skills to run a practice there is a significant financial benefit to being an owner as opposed to an associate.
4. If you currently have school debt will a lender loan you enough money to carry both a practice and school debt? If not you may want to consider a partnership which would allow you to buyout the previous owner over a reasonable time period (3 to 5 years). Most banks are more receptive to this model if the purchaser has significant school debt.

The answer to this question is totally dependent on what outcomes each partner is looking for. Things to think about are:

1. It is important to understand the difference between Cost Sharing Partnerships and Equity Partnerships. In Cost Sharing Partnerships each practitioner owns his/her own practice and have certain rights to operate their practice as they see fit. In an Equity Partnership the practitioners share in the ownership of one combined practice and usually must agree on operational issues.
2. If it is important to you that the practice function with one set of protocols then an Equity Partnership would be better then a Cost Sharing Partnership.
3. If you want to run your practice somewhat independently then a Cost Sharing Partnership would be more preferable than an Equity Partnership.
4. Sharing of new patients can become very competitive in a cost share environment. In a true partnership the focus is on what is best for the new patient (ie: hours, type of services required and many times age) because the partners are ultimately sharing the profit.

An Equity Partnership usually provides more control to each partner over the whole office as decisions need to be made jointly however many people are not good at sharing the decision making process and should probably practice on their own. When the operations of a Cost Sharing Partnership become too divergent the practice usually ends up failing or splitting up which can be very disruptive and expensive for all concerned.

From a vendor’s perspective a sequential sale has two principal objectives:

1. The first step allows the owner to crystallize (take out) part of the equity value of the practice and to continue to work and share the profit of the practice.
2. The second step allows the owner to sell the balance of the equity in the practice usually for a higher price than the first sale.

The result is that an owner is able to preplan and document the sale of his practice and continue to participate in the profit and the growth of the practice, years before he/she actually wants to retire. This eliminates a number of risks including health risks and significant change in market value risks.