Brief Summary
This video emphasizes the importance of calculating buyer profitability, not just relying on seller's profit, when purchasing a dental practice. It highlights the flaws in traditional accounting methods that don't account for the buyer's production capabilities and the actual number of active patients. The video provides a formula to estimate buyer profitability, focusing on active recall patients, potential attrition, new patients, and the buyer's production capability. It also warns against common mistakes and biases from brokers, bankers, and accountants who are incentivized to close deals quickly.
- Focus on buyer profitability, not seller's profit.
- Active patients are key to estimating revenue.
- Be wary of advice from those incentivized by the sale.
Understanding Seller vs. Buyer Profit
When buying a dental practice, the primary focus should be on how profitable the practice will be for the buyer, not how profitable it was for the seller. Traditional estimates from accountants often rely on the seller's performance and growth projections, which can be misleading. The seller's production levels are not indicative of what the buyer will be able to achieve, especially since the seller will no longer be present full-time. The key to profitability lies in the buyer's ability to produce and the number of active patients at the practice.
Estimating Your Income as a Buyer
The amount a buyer makes is determined by their production capability multiplied by the number of active patients. It's crucial to focus on buyer profitability rather than seller profitability. Brokers and sellers may present inflated earnings numbers (EBIDA) to make the practice seem more attractive. EBIDA, or earnings before interest, taxes, and amortization, is essentially profit, but it can be misleading due to accounting tricks. The most important factors are the number of patients and what the buyer can produce with those patients.
What is Buyer Profitability?
Buyer profitability is the actual income a buyer will keep after expenses and loan payments, which determines if the practice is worth buying. This number is not found on tax returns or P&L statements and must be calculated personally. It's important to determine how much money you need to meet your lifestyle demands, considering factors like location, family responsibilities, and hobbies. Aim to make enough to support your lifestyle and save for retirement.
Buyer Profitability Formula Explained
The buyer profitability formula starts with estimating the buyer's revenue, which is based on the number of active recall patients. Do not rely on inflated numbers from brokers or sellers. Determine the number of active patients by counting patients coming in for hygiene or by analyzing the production by procedure report. Multiply the number of active recall patients by 0.8 to account for patient attrition. Add the number of new patients to this figure. Then, multiply the total number of patients by the amount of money you are able to produce per patient per year to estimate your first year revenue.
Calculating Loan Payments
To calculate buyer profitability, multiply the buyer revenue by 0.4 (assuming a 60% overhead) and subtract the practice loan payments for the year. Loan payments can be estimated using online loan payment calculators. While paying back the loan builds equity, it's important to consider the impact on monthly cash flow.
Who to Trust for Financial Advice
Accountants, brokers, sellers, and banks are all incentivized to have you buy the practice, which can lead to biased advice. Accountants may overestimate profitability based on the seller's performance. Brokers and sellers benefit from a higher purchase price, as brokers get a commission on the sale. Bankers also get a commission based on the purchase price, so they may steer you towards more expensive practices.
Common Mistakes to Avoid
Common mistakes include using seller's numbers without adjustments, ignoring recall attrition, and overestimating your ability to produce at the seller's level. Be realistic about your production capabilities and consider factors like insurance networks and referral networks. Also, be careful when you buy a big practice because loan number that you have to pay back can be really high.
Questions
The video addresses common questions, such as how this model differs from what an accountant shows, why recall patients are multiplied by 0.8, and whether this model should still be used if you plan to grow the practice. It emphasizes the importance of conservative estimates and using your current associate production to calculate revenue per patient. The video also discusses overhead costs and whether the model works for startups (it doesn't).
