One common question that often arises when considering the purchase of a dental practice is the impact of the previous owner’s collections on the practice's value. Understanding this relationship is crucial for making informed decisions and navigating the complexities of a dental practice acquisition.
By exploring the significance of collections and their influence on a practice's value, we hope to empower you with the knowledge necessary to navigate this aspect of practice acquisition successfully.
Practice Performance and Financial Indicators:
The average dental practice collects approximately 96% of its production, indicating a strong revenue generation capacity. However, keep in mind that this percentage can vary based on factors such as practice location, patient demographics, and payer mix. It is essential to evaluate other financial indicators alongside collections, such as profitability and revenue trends, to gain a comprehensive understanding of the practice's financial performance.
Consistency and Trends:
Research indicates that dental practices experiencing an annual growth rate of 5% or more in collections tend to have a higher valuation. Consistency in collections is key. Analyzing collections over multiple years can help identify any significant fluctuations or declining trends, allowing you to assess the practice's stability and potential for growth under new ownership.
Quality of Accounts Receivable (AR):
When evaluating the quality of accounts receivable (AR), it is helpful to review the aging report. A healthy dental practice typically maintains a low percentage of aged accounts, with the majority falling within the 0-30-day aging categories. Aim for an AR aging distribution where no more than 10-15% falls in the 90-day or older category as this AR is often considered uncollectible. A love percentage in the older AR category demonstrates effective management of patient accounts and increases the attractiveness and can increase the value of the practice.
Insider tip: Online reputation management plays a significant role in attracting new patients and enhancing collections. Review the practice’s online review platforms and social media. A positive practice reputation not only influences collections but also contributes to the overall value of the practice.
For dental students and prospective practice buyers, understanding the impact of collections from the previous owner on the value of a dental practice is essential. By analyzing practice performance, consistency and trends in collections, the quality of AR, and practice reputation, you gain valuable insights into a practice's financial health and potential for future success. Armed with this knowledge, you can approach a dental practice acquisition with confidence, making informed decisions that align with your professional goals and aspirations.