Most business purchasers will rely on a valuation formula to tell them the ballpark of what things should sell for. For some dentists, whose cognitive strengths and training up until that point have been scientific in nature, the desire to adhere to guidelines like a formula can be greater and more inflexible than for others.
Many a time I have come across a dentist that has been looking for the right practice to buy for quite some time, only to turn down an opportunity that was otherwise perfect for them because their formula or “their advisors” told them it was overpriced (sometimes by as little as ten or twenty thousand dollars).
These buyers are not uninformed. They argue their position, armed with spreadsheets and formulas, correspondence from reputable accountants and real estate agents, to justify their position. All of this research may be 100% accurate and valid, but it just plain misses the point.
1.There is nothing wrong with using a formula to get you into the ballpark, but it isn’t meant to be rigidly held on to without some flexibility and ability to compromise.
Lately, every city and town of Australia has had stories of real estate selling for record prices at auctions, way above the reserve. If you went to one of these real estate auctions and told everyone to stop bidding because the price had gone above the reputable valuation that you had, you would be laughed out of the room.
Simply put, a dental practice value that is sold on the open market with competitive tension doesn’t adhere to a valuation or formula. Something will sell for what the market will bear.
2.If you are relying on the advice of an accountant or financial planner to give you a price, how do they:
- Factor in the opportunity cost and frustration involved in inaction for you? How much is it currently costing you, not being able to set your own fees, allocate patients and have clinical independence? How much is it costing you in lifestyle, not being able to set your own hours and decide when you can take holidays?
- Know how often or rare it is for a practice that is right for you comes on the market? It could be another year or two till another opportunity like this comes up.
- Value the opportunities of a dental practice purchase, like poor competitors, clinical underservicing or under availability?
- Factor in the supply and demand that exists for practices like this one?
Surely each of these deserves some price adjustment that an accountant or financial planner will not be able to give you.
Conclusion.
There are two points that I am trying to make with this article:
- You may be 100% correct in your research, use of formula and appraisal. You may be able to sleep happy, knowing that you didn’t pay $20k more than your research and advice dictated. However, your reward for sticking to your guns could be staying in your underappreciated job, watching as the (more flexible) buyer of your perfect practice takes it from strength to strength and becomes wealthy in the meantime.
Sometimes, in business negotiation and acquisition, you need to choose to be either right or rich.
You can win the battle by adhering to your formula and not being flexible on price and terms, only to lose the war in overall wealth creation.
2. There is no valuation formula that anyone can give you that will work equally accurately in every local market in Australia, regardless of supply and demand, risk and opportunity. There is no valuation technique that can factor in the strengths of your preferences and opportunity costs of inaction. Valuation formulas are valuable as a guide, but they can only get you part of the way. At the end of the day, the question isn’t “what the opportunity is worth according to this formula”; the real question is:
What is the opportunity worth to YOU?
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