Top 10 Mistakes When Selling Your Practice
By Rod Johnston, MBA, CMA
Omni has sold over 500 practices since we started selling over 20 years ago. The majority of our transactions go pretty smooth, but in nearly every transaction there are road bumps, hurdles, or just some things that need to be ironed out or discussed. Here are ten of the most common mistakes that sellers make when selling their practice:
- Waiting Too Long to Sell
Every business or practice owner thinks they can continue working until one day they decide to sell. They believe they can just put it on the market, and it will sell in a month or two for a high price. But timing is everything. If you decide to sell when your numbers are declining, you may lose hundreds of thousands of dollars. Selling when rates are high also reduces value, as banks assess the cash flow after debt service of your practice. Higher interest rates lower cash flow and, consequently, the value of your practice. Similarly, if you choose to sell during an economic downturn when there are fewer buyers, you may again lose value, and your practice could sit on the market for months—or even years.
- Not Watching Your Payroll
What is your annual payroll as a percentage of last year’s collections? It should be somewhere between 25% and 30%. If you get to a point when it’s time to sell and your payroll is high, a buyer will not look favorably at your practice. Keep your numbers up, and make sure your payroll is where it should be.
- Managing Patient Credits
Typically, you sell your accounts receivable less patient credits when you sell your practice. However, did you know that every state has a law requiring you to refund a patient’s credit if they have not been active in your practice for a certain period, typically around three years? If you cannot locate that patient, you need to send the patient credit to the state where your practice is located. This is known as the unclaimed property or escheatment law. Look it up and manage your patient credits accordingly.
- Lingering Liens
Have you ever borrowed money against your practice? You may want to run a lien search to check if any liens are still against your practice. Even though you may have paid off the debt, banks are notorious for not releasing the lien once the debt is paid off. You can perform a lien search, also called a UCC search, on your state website, or contact an attorney or a service that conducts lien searches to examine your practice for any liens.
- Renewing Your Lease
If you are renewing your lease, now is the time to discuss assignability with your landlord, real estate broker, or attorney. Try to include assignability language in the lease. Many times, landlords will require you to stay on as a responsible party for the life of the lease, even after you have sold the practice. Having assignability language can help you be released from personal liability on the lease sooner rather than later.
- Not Giving Enough Time to Find a Buyer
On average, it takes about nine months to sell a practice. If you have a great practice in a desirable area, the time will probably be less. However, if your practice has low production, under $350,000, it will take longer to sell. Practices in remote areas, which are less desirable than metro or affluent areas, also tend to take longer to sell. Small practices with only 2 or 3 operatories will generally require more time as well. When we say longer, it could mean twelve months, or it can be up to five years.
If you’re in a remote area like the San Juan Islands, consider starting the sale process five years before your ideal selling date, as fewer doctors may be looking to practice there. If you find a buyer years before you’re ready to sell, congratulations! You have a bird in the hand—take it! You can then consider working for someone else, teaching, or work back in the office. It is a good problem to have if you sell before you really want to in a remote area.
- Not Weighing All Your Options
There are numerous ways to sell and various types of buyers. You can sell to an individual, a corporate-owned group, a small local group, or even to an associate. Working with a broker can help you explore and discuss your options. Perhaps you want to sell and then work back, or maybe selling to a larger group is a better fit. Brokers know the market and can help design an optimal transition plan for you.
- Failing to Plan
This is more than just failing to plan; it’s failing to put the plan into action if you have one. Banks and brokers look at the last two or three years of tax returns to determine the value of your practice. If you want to maximize the sale of your practice, your best years need to be your last two or three years. If necessary, hire a consultant to help you streamline your practice, increase production, and reduce overhead. Most importantly, keep your foot on the gas!
- Selling On Your Own
I have spoken to doctors who sold their practices themselves. One doctor, who was collecting $1.5 million, sold his practice in a nice metro area for $500,000. I did not have the heart to tell him that he undervalued his practice and could have gotten another $500,000 to $700,000. We have listed practices where the seller tried for two years to sell on their own, thinking just placing an ad in the state association would be enough. We sold these in four months. In other cases, sellers were difficult to work with, scaring away every buyer interested in the practice. Hire an expert to take the emotions out of the transaction. You may not always get a higher price, but you’ll likely save on stress and avoid costly mistakes.
- Not Hiring an Attorney to Prepare Documents
We have had buyers and sellers who wanted to save a few thousand dollars by simply reviewing the agreements themselves. They would ask for changes to the document and send them to the buyer. The buyer would then send the changes to their attorney, who would reject them, leaving the sellers unaware of the legal reasons for the rejections. A transaction that should have taken two months to complete ended up extending to six months and then ultimately fell apart. Hire an attorney and get it done right. It’s one of the biggest transactions you will make, so ensure it is handled correctly.
Being on top of these ten items will help ensure a smooth practice transition. Contact us for a free consultant and help you get started on planning for your transition.
Read MoreTop 10 Mistakes When Selling Your Practice
By Rod Johnston, MBA, CMA
Omni has sold over 500 practices since we started selling over 20 years ago. The majority of our transactions go pretty smooth, but in nearly every transaction there are road bumps, hurdles, or just some things that need to be ironed out or discussed. Here are ten of the most common mistakes that sellers make when selling their practice:
- Waiting Too Long to Sell
Every business or practice owner thinks they can continue working until one day they decide to sell. They believe they can just put it on the market, and it will sell in a month or two for a high price. But timing is everything. If you decide to sell when your numbers are declining, you may lose hundreds of thousands of dollars. Selling when rates are high also reduces value, as banks assess the cash flow after debt service of your practice. Higher interest rates lower cash flow and, consequently, the value of your practice. Similarly, if you choose to sell during an economic downturn when there are fewer buyers, you may again lose value, and your practice could sit on the market for months—or even years.
- Not Watching Your Payroll
What is your annual payroll as a percentage of last year’s collections? It should be somewhere between 25% and 30%. If you get to a point when it’s time to sell and your payroll is high, a buyer will not look favorably at your practice. Keep your numbers up, and make sure your payroll is where it should be.
- Managing Patient Credits
Typically, you sell your accounts receivable less patient credits when you sell your practice. However, did you know that every state has a law requiring you to refund a patient’s credit if they have not been active in your practice for a certain period, typically around three years? If you cannot locate that patient, you need to send the patient credit to the state where your practice is located. This is known as the unclaimed property or escheatment law. Look it up and manage your patient credits accordingly.
- Lingering Liens
Have you ever borrowed money against your practice? You may want to run a lien search to check if any liens are still against your practice. Even though you may have paid off the debt, banks are notorious for not releasing the lien once the debt is paid off. You can perform a lien search, also called a UCC search, on your state website, or contact an attorney or a service that conducts lien searches to examine your practice for any liens.
- Renewing Your Lease
If you are renewing your lease, now is the time to discuss assignability with your landlord, real estate broker, or attorney. Try to include assignability language in the lease. Many times, landlords will require you to stay on as a responsible party for the life of the lease, even after you have sold the practice. Having assignability language can help you be released from personal liability on the lease sooner rather than later.
- Not Giving Enough Time to Find a Buyer
On average, it takes about nine months to sell a practice. If you have a great practice in a desirable area, the time will probably be less. However, if your practice has low production, under $350,000, it will take longer to sell. Practices in remote areas, which are less desirable than metro or affluent areas, also tend to take longer to sell. Small practices with only 2 or 3 operatories will generally require more time as well. When we say longer, it could mean twelve months, or it can be up to five years.
If you’re in a remote area like the San Juan Islands, consider starting the sale process five years before your ideal selling date, as fewer doctors may be looking to practice there. If you find a buyer years before you’re ready to sell, congratulations! You have a bird in the hand—take it! You can then consider working for someone else, teaching, or work back in the office. It is a good problem to have if you sell before you really want to in a remote area.
- Not Weighing All Your Options
There are numerous ways to sell and various types of buyers. You can sell to an individual, a corporate-owned group, a small local group, or even to an associate. Working with a broker can help you explore and discuss your options. Perhaps you want to sell and then work back, or maybe selling to a larger group is a better fit. Brokers know the market and can help design an optimal transition plan for you.
- Failing to Plan
This is more than just failing to plan; it’s failing to put the plan into action if you have one. Banks and brokers look at the last two or three years of tax returns to determine the value of your practice. If you want to maximize the sale of your practice, your best years need to be your last two or three years. If necessary, hire a consultant to help you streamline your practice, increase production, and reduce overhead. Most importantly, keep your foot on the gas!
- Selling On Your Own
I have spoken to doctors who sold their practices themselves. One doctor, who was collecting $1.5 million, sold his practice in a nice metro area for $500,000. I did not have the heart to tell him that he undervalued his practice and could have gotten another $500,000 to $700,000. We have listed practices where the seller tried for two years to sell on their own, thinking just placing an ad in the state association would be enough. We sold these in four months. In other cases, sellers were difficult to work with, scaring away every buyer interested in the practice. Hire an expert to take the emotions out of the transaction. You may not always get a higher price, but you’ll likely save on stress and avoid costly mistakes.
- Not Hiring an Attorney to Prepare Documents
We have had buyers and sellers who wanted to save a few thousand dollars by simply reviewing the agreements themselves. They would ask for changes to the document and send them to the buyer. The buyer would then send the changes to their attorney, who would reject them, leaving the sellers unaware of the legal reasons for the rejections. A transaction that should have taken two months to complete ended up extending to six months and then ultimately fell apart. Hire an attorney and get it done right. It’s one of the biggest transactions you will make, so ensure it is handled correctly.
Being on top of these ten items will help ensure a smooth practice transition. Contact us for a free consultant and help you get started on planning for your transition.
Read More5 Considerations when Buying a Veterinary Practice
How many years you should have under your belt before you own a practice? Typically, the number is five years, but that the number really depends on the doctor. We’ve had doctors who were able to purchase a practice after three years and do quite well. A lot depends on your comfort level, skill set and experience.
Here are some things to consider before you buy:
- Are you comfortable with your clinical skills? If you have been out of veterinary school 3 to 5 years, you should have a feel for where you are with your skills. A lot depends on the clinic(s) or hospital(s) you’ve been working. Some may limit what you’re doing and others just may not be busy. If you’re in a location that’s given you a variety and volume of experience, you should be getting a good amount of experience.
- Have you seen a good practice in operation? Sure, you’ve been working in one or more clinics, but are they well run? Or, if they’re not, you know the difference. If you are in a well-run practice, you should be observing how the doctor and/or office manager treat the staff. Whether a veterinary assistant, office manager, or veterinary technician, they should all be treated well. How about the patients and clients? They should be given good, Nordstrom-like treatment. They pay your rent and you want them coming back.
- Do you know how to read financial statements? Most veterinarians in the early stages of their career don’t know what a financial statement is let alone how to read one. There are on-line courses such as accounting for non-accountants and other courses on financial statements and bookkeeping that can fairly quickly teach you what the financial statements are and how to read them. Understanding them is imperative in running any business.
- Now that you know how to read a financial statement, do you know what the numbers should be? What percentage of collections should your payroll numbers be? What about rent? Etc., If you don’t know, there are resources you can look at on-line where you can learn. Watch all of the White-Board Wednesday videos from Joel Parker, DVM that are on line. They are great in teaching you numbers as well as other aspects.
- Practice Management – Learn as much as you can with the free stuff on-line. From the White-Board Wednesday videos to other on-line courses, you can learn a lot for no cost to minimal cost. This will quickly help you grasp the key concepts of managing a practice.
These are just a few things you can do to prepare you to own a practice. Keep in mind that practice owners typically make 20% to 25% more than an associate veterinarian. In addition, the equity you build in a practice is a great source of retirement.
If you’d like to talk to us about your individual situation, contact us and we can help!
The Newby, The Young Gun, The Rockstar & The Legend…Which One Are You?
By Jon Rutty, Practice Transition Specialist
Have you ever wondered what it will be like to transition your practice? No doubt you have heard stories from mentors or colleagues about the process and perhaps that is the reason you haven’t even thought about it or had the thought “I’ll cross that bridge when I get there.” But here’s a question, what if you’re on the bridge right now and you don’t even know it?
For over a decade I have helped doctors across the nation improve their practices. I have traveled to 41 states and met doctors with all sorts of ambitions, but in my humble opinion, the majority of them fell into one of two buckets.
- The doctors who waited too long to start thinking about their practice transition and who are now desperately trying to make something happen before they get too tired to continue, or worse lose their health; or
- The doctors who have not even begun to think about their practice transition but soon begin to realize, “If I don’t sell when I’m at a high, I may not be able to make the return on my investment like I want to”.
So how do you know when you should start to look. Here are some key factors that assisted my most successful clients in transitioning well.
- They started the process of inviting another provider in before they even thought of a transition. And because they did, they got to find the right person for the job. They weren’t desperate for someone to take over quickly or to fit a specific mold. They had agility because they had time on their side.
- They saved for their retirement early. While many of the doctors I worked with were running out of steam and low on money to support their retirement, the wisest doctors had been saving for years and were working with a professional to assure that they would not be solely dependent on their practice sale to fund their dreams.
- They had a clear vision for what they wanted. Some doctors I know don’t have a vision for their next steps and because of this they wait too long to begin the process of finding a suitable doctor to join them in transitioning. But when you have a vision behind your eyes, you can see how the work you put in now to make the practice desirable to potential buyers will pay off and you operate with clarity and on purpose instead of “one day.”
So where do you stand? Where are you on your transition timeline?
The Newby – I just bought a practice. I’m beginning to dream about my career and will dedicate time to building out my ideal retirement throughout the process.
The Young Gun – I’ve been practicing for 5-10 years now and have a nice sized practice. It may be time to start inviting another doctor in to have flexibility and perhaps find a future business partner.
The Rockstar – I’m at what could be the peak of my career. My use-before date is closer than my born-on date. I have thought a lot about when and how, but I’ve never taken any steps to discover more.
The Legend – I was booming just a few years ago, but I’m seeing some decline in my office and I’m tired of trying to find new ways to market myself. Add to that, a lot of my colleagues are retiring. It’s just a matter of time now.
No matter who you are in this scenario I can tell you that as a business owner, if you don’t seek out a highly skilled transition consultant, then you are either spending too much time trying to figure out what works, or you are likely depending on the experience of staff to help you grow your business. Omni has a long history of helping doctors with successful practice transitions. Newby, don’t wait too long to find one. Young Guns, same to you, but you are likely in a place where you need to start looking for a doctor to join your practice. Rockstars and Legends, it’s past time to talk with someone about your transition. Even if you are still 5-8 years away from taking the plunge, you owe it to yourself to talk with an experienced transition expert to discover the best options for you moving forward.
At Omni, we specialize in helping owners transition their practices into the hands of capable and competent private owners. We can arm you with a practice valuation so that you can see what your next step could be and for those of you reading this newsletter, we are happy to do that absolutely FREE. That’s a cost savings to you of about $3,500. Click the link below for more information on how to begin the process.
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Where to Own a Dental Practice?
The question we often get from potential practice buyers is “Where is a good spot to own a dental practice?” There are a lot of factors that contribute to answering that question. But first, let’s discuss the reasons why you want to own a dental practice.
If you are in it because you love dentistry and love helping patients and you are not necessarily in it to make the big bucks, you can really own a dental practice almost anywhere. A lot of buyers seem to want the downtown metropolitan practice thinking it’s a great place to practice since there are so many potential patients and you can live the urban lifestyle. I’ve helped doctors who absolutely wanted to be in a metropolitan area, even though the demographics made no sense whatsoever, who then started a practice and did quite well. One doctor that I helped always dreamed of owning a practice in a particular city. He went for it and is successful. And I have seen others want a practice in a certain area, and although the numbers didn’t make sense, they did it anyway and were successful.
Some of you are buying a practice because you want to make a lot of money, in which case, further analysis and discussion are needed. The failure rate for dentists is infinitesimal – somewhere around .0125%. If you’re buying an existing practice and you have identified that the practice already has good cash flow, you can purchase the practice and have success almost no matter where it is. If it’s a poor performing practice, you would need to examine if the poor performance is because of the location, the management, or something else. If you want to buy an existing practice and are looking for an opportunity to grow and have lower overhead, I would suggest looking outside of the metropolitan areas. Practices outside of metropolitan areas have less competition, wages and rents are lower, and it’s easier to grow those practices. And if you are considering doing a startup practice, the same rules apply. Look for a location with good demographics outside of metropolitan areas. Of course, if you absolutely want to be in a metropolitan area, don’t be afraid to go for it. Just look closely at the numbers and hire a good dental practice or real estate broker to help you out.
I do recommend that you do a bit of demographic analysis on the locale. See how many dentists are currently practicing in the area. A good ratio is 2,000 daytime population for each doctor. There is a difference between the daytime population and the regular population. The daytime population includes the workforce. For example, if you look at the population of South Lake Union during the day vs. the nighttime population, you would see a big difference. Another demographic to pay attention to is the age of the population. For a general practice, a good mix of young and old is best. If you want a high cosmetic practice, but the average age is 28, you might need to consider another area. Homeownership is another good indicator of practice success. You want to have more homeowners than apartment renters. You can obtain detailed demographics either through a company that will charge a fee and provides data such as the average annual dollar amount spent on dentistry per person within a zip code and other more granular items. Or, Omni has information that we can provide.
One of the advantages of working with Omni is that we have both dental practice brokers and real estate brokers to help you traverse the ownership trail in any way we can. Just give us a call at 877-866-6053 or email us at info@omni-pg.com and we’ll be happy to help get you started. Contact us today!
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