The “IKEA effect” and your practice value

You’ve asked around and you know how much it would cost to build your practice from scratch. 

You know how hard it was to grow your business. The years of hard work, long hours and short holidays.

You know the special place that your practice is. The loyal patients, the great staff, the opportunities left on the ground that you haven’t had the time or inclination to explore.

You have heard the price that your friend got for their practice, and you think you know how your practice compares.

Armed with all of this, it must be obvious what your practice is worth… right?

Unfortunately, probably not.

When it comes to the value of your own business, it can be tempting to rely on your intuition and gut. However, the intimate relationship an owner has with their business is often the very reason why their appraisal is flawed.

The "IKEA Effect" is a term coined by behavioural economists, to explain why people place a disproportionately high value on things they have personally created…like furniture…or a meal…or a business.

When a dental practice owner has spent years building and nurturing their practice, they become emotionally connected to it. The more emotionally attached a business owner becomes to a business, the harder it becomes to look at it from the perspective of a neutral party. This bias can lead to:

1. Overestimating the value of its strengths, like potential future earnings - if only the practice was still open Saturdays or still doing ortho like it used to, or had a social media presence. It can also lead to overestimation of the strength of your brand, or even the quality of your team.
2. Underestimating the value of its weaknesses. People often become blind to their own mess. Dental practice owners ignore or underestimate the inefficiencies in how they run their practice as they get used to them, they buy from labs and sales reps that they have relationships with, regardless of cost differential. They give pay rises beyond industry norms for “loyalty”, thinking that a buyer will appreciate and be happy to pay more for the quality of staff that they are getting (they won’t). They ignore the need for reinvestment, as what they have works for them.

In a practice sale dynamic, this bias can lead to a grossly inflated price being quoted to buyers and unrealistic expectations from a vendor.

This is no small thing.

Practice sales have a momentum. You ideally want a buyer to be excited by the opportunity when they see it, with this excitement carrying them to the finish line.

Going back to market with a reduced price, weeks or months after buyers lost interest in a practice with an inflated price, is like trying to light fire with wet wood. It’s theoretically possible, but psychologically you are working under extremely poor conditions to get a result. It is infinitely easier to get it right the first time.

Just as you might overlook imperfections in a piece of furniture that you assembled yourself, you may also be overlooking critical factors that affect your business’s value. The IKEA Effect can lead you to become overly attached to your emotional perspective of your business, rather than recognising it for what it is. 

An independent third-party appraisal provides a counterbalance to the biases created by personal attachment. Third-party appraisals from industry experts analyse businesses from an objective standpoint, using established methodologies, industry benchmarks and known comparables. This, in turn, helps you go to market with realistic expectations and a proposal that buyers are going to respond to.