Evaluating the clinic’s worth
Let’s start from the end: there is no single formula for evaluating the worth of an active clinic. In the business world, there are many formulas for evaluating an active business; the problem is that the seller adopts the formula that will lead to the higher value while the buyer adopts the formula that will assess the clinic at a lower value. However, several objective factors affect the value of a business, such as supply and demand, profitability, business turnover, and equipment or real estate value. These create a certain starting point for evaluation, which will be negotiated by the seller and buyer.
Before I present the factors that affect the value of a clinic, it is worth clarifying one important matter – the value of the clinic consists of two main parameters: tangibles and reputation.
A. Tangibles refer to all the items in the clinic that can be priced in an objective manner such as units, panoramic cameras, and furniture.
B. Reputation refers to how much the clinic brand is worth, as well as its customer base, which is already much more complicated than price.
The initial stage in assessing each clinic’s value is the value of the tangibles. As mentioned above, this is a relatively simple and easy assessment procedure. We examine the existing equipment, assess its wear and tear, and how much it would be worth if we wanted to sell it. The tangibles mainly include the units, furniture, computerization, x-ray equipment, etc. Usually the value of the tangibles is not high, as it is not new equipment with high depreciation and wear.
As stated, the second stage of the evaluation, which examines the clinic’s reputation, is much more complex. However, here are some parameters to consider and which will help you evaluate the worth of the clinic’s reputation.
1. Sales turnover and profitability are undoubtedly the two most important parameters evaluating the clinic. Of course, when sales and profitability are higher, the value of the clinic will be higher. Here you should look at the sales cycles and the profitability of the clinic compared to what is common in the dental industry.
2. Clinic potential – Although it is important to examine how much the clinic is earning today, how much it can earn is even more important; in other words, what its business potential is. In one of my consultations, I worked with a client and recommended purchasing a clinic even though it lost money and even though the seller requested a relatively high price for it. The reason for the recommendation was that my analysis showed that the clinic had lost money not because it was not good, but rather because it was severely mismanaged from the marketing-organizational perspective.
My assessment was that the clinic had a reasonable potential to double the sales cycle by making some strategic changes, and the reality turned out to be even better than expected – after making some strategic changes, the clinic succeeded in tripling its sales within a year and turned out to be an excellent investment. If we had looked only at the profitability of the clinic the buyer would have decided not to purchase; however, as mentioned above, what matters more is the potential and less the current situation.
3. Examining the alternatives – It all depends on what alternatives you have. Suppose that after examining a number of alternatives, you have two attractive options: first, an active clinic with a sales turnover of $100,000 per month at a purchase price of half a million. The second option is the establishment of a new dental clinic at the price of $350,000. Of course, the first option is much more attractive, though it is more expensive. The difference between the options is $150,000 but the first includes an active customer base that generates a sales turnover of $100,000 per month, compared to the second option, which requires a large financial investment and a long time to build a customer base.
4. Customer loyalty – Is the clinic in question one with high customer loyalty, or are most customers casual visitors who come in following advertising? This data is very important because if customers come mainly from word of mouth and there is high customer loyalty, this testifies to the strength of the clinic and vice versa. If there is no loyalty to the clinic, and most of the customers come in through advertising, this should be a red flag: First, why don’t customers recommend the clinic? Second, if customers do not recommend the clinic, this means that the clinic needs to invest a lot of money in advertising in order to introduce new customers, and this is not a positive situation.
How do you check the level of customer loyalty? With two main indicators. The first is, how many customers come to the clinic through word of mouth? If most customers arrive by word of mouth that means there are more recommenders, which indicates high loyalty to the clinic. The second is, how many clients come in for dental hygiene treatments and periodic examinations? Customers who visit the clinic every six months are evidence of loyalty to the clinic. By the way, many of those who sell a clinic flaunt the size of their customer pool – “I have 22,000 customers in the database” – but what matters is not how many customers there are in the database, but rather how many of them are active and loyal to the clinic.
5. Miscellaneous – Two other parameters should be examined in order to evaluate the clinic’s worth.
A. Fixed costs – A clinic with high fixed costs such as rent or management fees is less attractive than a clinic that offers low fixed costs.
B. Labor – Will the existing personnel remain or should new workers be recruited? In most cases, a good employee should stay, mostly because this provides continuity for customers, and this is one of the most important things in purchasing an existing clinic.
This article is taken from the book:TURN YOUR DENTAL PRACTICE INTO A SUCCESSFUL BUSINESS. THE GABRIEL ASULIN METHOD. Amazon #1 Best seller in Dental Materials Category (Jan2020)