Determine Risk and Increase the Valuation of Your Dental Practice

Valuing a business in Australia isn’t a science so much as an art. Without the purchase history that businesses in countries like the United States can use as a benchmark, us Aussies need to do some math to figure out what our businesses are worth on today’s market.

If you are thinking about selling your business now, in three years, or perhaps not for many years, setting up your practice to be attractive to a buyer can do nothing but make your business stronger.

When we talk about valuing a business, one of the largest factors that comes into play is risk. How much risk does this business carry? That means when we talk about increasing the value of a business, it usually goes hand in hand with minimising risk.

How do we determine risk when valuing a business?

When we are thinking about risk, we should be thinking about it on both macro and micro levels. For example, the first level of risk is the country. What country are we in? How much risk does that pose? This is called the market risk premium (MRP) – essentially the stock market is looked at over a 40-year period to see its relation to the bond rate. Usually this number is between six and seven percent.

Next we can start looking at business-specific risks. This will cover a lot of territory and you’ll want to start asking questions like:
• How many customers does this business have?
• Do your customers sign a contract?
• What happens if you lose customers?
• Does the business buy products from overseas? Is there an element of foreign exchange?
• Do they have one business location or many?
• Does the business have a ‘key person’?
• Are there systems and processes in place?

While there is nothing you can do about the market risk premium of Australia, you can take on the challenge to reduce risk within your specific business. Taking the time to do this now can not only help you reduce future disasters for your business, but increase the value for potential investors if you do choose to move forward with selling your practice.

Make your practice more valuable in just five years.

For those of us that might want to sell our practices sometime in the future, five years is a great amount of time to create a plan to stabilise your business and increase your valuation.

Step one. First things first. Let’s talk profit. When most people think about the value of a business, they likely think about profit first. Creating a strong revenue stream is important but creating a stable one is as well. If you can create stable, predictable cash flow for the next five years you’re creating a strong roadmap that tells investors, “Hey, this is what you can anticipate if you buy my practice.” Consistently hitting metrics is a great way to increase the confidence in the valuation of your business.

Step two is to make sure that your financial statements are in good order. Sometimes there are tax minimisation items that fall more into a personal realm. If you can do this in such a way that you can identify it for a buyer, that can be incredibly helpful. Somebody else that might purchase your practice might not be able to use the same strategies as you.

Next, ensure that you are paying everyone (including yourself!) at a commercial level. Often business owners that pour their hearts and souls into their business underpay themselves. This speaks to profitability again. If you are not paying yourself at a commercial level for a dental practice owner, then work toward making sure you do

Minimise your risk and increase the value of your practice without spending a dime.

Now that the financial realm has been worked through it’s time to look at de-risking your business by overhauling your systems and processes.

Essentially, you don’t want your business to hang on the work of a ‘key person’. You want to split duties across multiple people. That way if someone has to suddenly take time away from the business, others can assume those duties and the business carries on. This reduces the liability wrapped up with a key person.

When you are doing this, taking the time to document roles, responsibilities, and what people do can also help reduce risk within a business. When these duties are documented, someone else can step in and see how your practice is structured. They can say, “Oh, so you employ two dental hygienists and their roles are X, Y, and Z.”

Create training for each of these defined roles. What does a new employee need to know to be successful within your practice? What are your policies and processes? Do you operate at the industry best practice standard? This is helpful because it minimises the amount of time it takes for a new hire to onboard and get up to speed, reducing the cost of turnover.

When a business has these processes and systems in place so that the business is its own, sustainable entity where people can come and go and the business itself carries on, suddenly you have reduced a lot of risk for a new owner. They won’t be asking questions about, “What if Susie quits? She’s integral to this operation.” They will know what roles are there, how to hire and train new employees, and keep the business going.

Final Words…

When you look at it in its entirety, it can seem daunting to overhaul a business to minimise its risk and increase its valuation. However, on a five-year scale, you can take baby steps towards a more stable, profitable future business.