Will technology drive enterprise value when you exit?
Sponsored Content: TUSK Partners
We are often asked by clients if they should invest in new technologies to help drive up value in their practice or group. They may be looking to upgrade to CEREC, CAD-CAM, or get their first CBCT. Some are interested in migrating to a new practice management system, automated patient communication software or add a call center (and people to staff it). We get it – dental technology is very cool these days!
The reality is that you should not make a single new purchase without understanding your exit plan. Why? Valuation in today’s dental market is based off EBITDA (Earnings before Interest, Taxes, Depreciation of your fixed assets, and Amortization of your goodwill). In essence, EBITDA is indifferent to the age and quality of the assets in your business. EBITDA is only focused on what type of operating cash flow those assets produce.
Technology alone is not a driver of valuation. The purchase of new technology is an investment in your business that you should expect to see a return on in the years to come, but it does not provide an immediate return on investment and very likely will not get you a ROI at the closing table if it has not shown a material improvement to EBITDA since it has been purchased and implemented.
You must start with the end in mind before making any major technology investments in your business. Follow these 3 simple steps to ensure that you get a ROI on any new purchases:
1. You must know what your business is worth today.
- TUSK works with hundreds of practice, group practices and DSOs each year to help them understand the value of their business.
2. Is the value of your business plus your current retirement savings enough for you to “hit your number”?
- Once you have hit the number, you may be taking on more risk than necessary and it could be a good time to exit.
3. Based on the answers to 1 and 2, do you plan on exiting in the next 12 months?
- If the answer is YES, then do not make any major investments in your business as it is unlikely that you will enjoy a return on any dollars spent.
- If you think that you will sell in the next 2-4 years, feel free to make investments in technologies that you are certain will grant you a quick payback and ROI.
- If you are looking to hold on to the business for 4+ years, you are in the “anything goes” category as you still have time to experiment, make major investments in technology and your team and your patient care.
Keep in mind that every buyer is different. Some care more about the technology stack than anything else, while some only care that the standard of care – relative to the surrounding market – is being met.
Finally, always reach out to TUSK for a valuation of your existing business. It’s difficult to determine what to invest in if you don’t fully understand the value of the asset you’re investing in or the buyers that may come to the table.