Revenue/Patient & Practice Value
In theory, the value of a dental practice is more or less equal the sum of the profit for the five-year period following the purchase of the practice converted into today’s dollars. In order to assess the likelihood of being able to maintain a profit, we need to know how probable it is for that profit to be sustainable over a five-year period. Profit is revenue less expenses, so an important aspect of profitability is the maintainability of the revenue. Knowing whether a practice is producing revenue at, above or below its ideal capacity becomes a very important factor in the determination of practice value and more importantly to the likelihood of that value to grow or shrink. The determination of average annual revenue per patient “AARP” will suggest one of three potential scenarios.
- If a practice is generating revenue at or near its ideal capacity, then it is likely that it will be able to maintain that level of production and with all other factors remaining the same, the value of the practice will be stable. There will be relatively little risk in the stability of the value of the practice.
- If a practice is generating revenue well above its ideal capacity, then there is the potential that it will not be able to maintain that level of production. If the revenues drop and all other factors remain the same, the accumulated profit and thus the value of the practice will likely drop. Higher than average AARP would indicate a higher risk for practice devaluation.
- If a practice is generating revenue well below its ideal capacity, then there is the potential for it to increase its level of production. If the revenues increase and all other factors remain the same, the accumulated profit over the next five years and thus the value of the practice will increase. Lower than average AARP would indicate a low risk for practice devaluation and a high potential for practice appreciation.
Of course, there are exceptions to every scenario, and it is important to find out the cause of any exceptions. In some cases, there will be very valid reasons why the AARP is other than the norm, and in many of these cases, the risk factors will be mitigated. It should also be noted that in some large urban centers, such as the GTA, gross production tends to be above the ideal or norm. The reason for the GTA phenomenon is that dentists are “forced” to generate greater overall production in order to compensate for the lower patient to dentist ratio, and to cover the provincially higher overhead costs.
Currently in Ontario the AARP, outside of the GTA, runs in the range of $200 to $250 of hygiene fees per active patient and $350 to $400 of dental fees per active patient, for a total practice amount of $550 to $650 per patient per year. AARP is the measure of the degree to which a practice is producing at its ideal sustainable capacity – it’s the measure of the sustainable revenue potential of the practice.
In order to calculate the metrics above, it is necessary to first determine the number of active patients in the practice and then divide the dental and hygiene revenues by the number of active patients. The definition of an active patient, for the purposes of this article, is a patient that has received treatment within the last 24-months. Clearly there will be patients in the 24-month period who will not end up as active or regular patients however, there will be patients outside of the 24-month period who will return to or be reactivated by the practice. Either way, the 24 month criteria is reasonable and relates to the metrics which we have set out above.
AARP should not be confused with dollar per hour production which is a measure of how quickly a practice and its providers can generate gross fees – it is not the measure of the potential capacity of the practice. AARP should also not be confused with the revenue produced per patient visiting the practice during a 12-month period – this is a false metric as it is only the measure of production per patient per year not the measure of the revenue potential of the practice.
If your AARP is well above the average, then you need to be able to explain why. If your AARP is well below the average, then you may want to look into how you can increase your AARP as this will increase the value of your practice. In most cases, almost all of the incremental revenue you can generate will go largely to your bottom line and thus will increase the value of your practice in a very material way.