Whether you’re selling a car, a house, or your dental practice the ultimate question that everyone wants to know is…. How much do I get? After all the years of blood, sweat, and tears you have put into your practice and you come to the point of retirement, or just selling to take a break from ownership, you want to know, after all the fees and expenses, how much money will you be putting in your pocket. Or, hopefully, bank account. Of course, the answer varies from sale to sale, but there are some general expenses and fees that you can be sure will be part of your transaction.
Why Practices Don’t Sell
By Rod Johnston and Jim Vander Mey
Your practice has successfully worked for you for many years so why isn’t it selling? It could be the transition consultant (broker) you are using, or it could be your practice.
Working with an experienced transition consultant is important. We know where and how to advertise. It doesn’t work to simply advertise on a website. You will want marketing and advertising in schools across the country, veterinary journals, and county/state societies. An experienced consultant already has a list of potential buyers for your area or type and may have other creative grassroots ideas to find the right buyer.
The right consultant cares about you, your team, practice, and goals. It shouldn’t be just about the commission money. Your consultant should be responsive and professional to potential buyers and you.
A comprehensive valuation and prospectus are important. If you or your consultant price your practice too high, it can be offensive to potential buyers, and they won’t feel comfortable offering a lower price. Even if you find a buyer willing to overpay for your practice, the bank will not finance 100%, which means you have to become a bank for a specific amount of the purchase price.
Sometimes even when you have the right consultant your practice may have other reasons for not selling. Sometimes it’s simply not finding the right veterinarian at the right time. Often it is because your location is not desirable to new buyers and their families. Sometimes it’s the size of the practice. We all know practices with two exam rooms can be very efficient and profitable, but many buyers want 3 rooms or more.
Declining collections the last 3 years or simply low collections can be a deterrent to potential buyers and banks. They understand reasons such as more time off due to vacation or health issues.
Most buyers understand they may need to update style or equipment and technology, but if it’s a lot of cost and effort, they may keep looking for a better practice.
If your practice falls into any of these areas of concern, it will take more time than the average to sell. Lowering the price may help, but if there is no interest, it’s not the price that’s the problem. Don’t give up or get mad, just understand that while your practice may have been perfect for you, it can be a while to find the right buyer.
Read MoreHow Much Will I Get for The Sale of My Practice?
Valuation Fee – To calculate what your practice is worth, you will need a valuation. If you are using a broker, they will charge anywhere from $1,500 to $4,000. Many will waive the fee if you are going to list your practice for sale with them. Others will back the fee out of the commission when your practice is sold. If you do not use a broker, you will still want a valuation. I suggest using a broker that has some type of certification in valuing a business. Rule-of-thumb-valuations are back of the envelope estimates at best.
Attorney Fee – You will need an attorney to draft up the purchase and sale and other agreements necessary to close the sale of your practice. Be sure and use an attorney that specializes in, or has completed a lot of dental practice sales. Attorney fees can range from $4,000 up to $10,000 with the average being around $5,500. Of course, this depends on the complexity of the transaction, who is representing the buyer and how many changes are requested during the review phase.
Broker Fee – If you are using a broker, you pay between 6% and 12% of the sale of your practice. The range is typically due to the size of the practice. Smaller practices that are producing less than $400,000 per year are harder to sell, require a lot of money spent on marketing and require many more hours to get to the closing finish line; therefore, those are typically in the 10% to 12% range. Larger practices typically are in the 6% to 10% range depending on a number of other factors. You can decide to not use a broker if you choose. Bankers and attorneys estimate that 50% of the practices sold without a broker fall apart before the sale is closed. Buyers lose interest in the practice, another opportunity pops up, or a disagreement occurs – and without an intermediary, sellers and buyers clash and the sale falls apart. A typical transition from beginning to end can take 200 to 400 hours to complete. Be sure you have that extra time in your life if you decide to sell without a broker.
Taxes – Here’s the biggie. When you sell a practice, the purchase price is allocated between goodwill and tangible assets, such as equipment. Goodwill typically makes up 80% to 90% of the purchase price. It is taxed at the capital gains rate of from 18% to 24%. The tangible assets make up 10% to 15% of the purchase price. These are taxed at your ordinary income tax rate. Most dentists fall between 28% and 35% ordinary income tax rates. The average is 33%. So, you can see, you want as much allocated to goodwill as your accountant and the IRS will allow.
Equipment valuation – This is typically not required, but occasionally requested by a buyer. This is commonly around $400 for the equipment valuation.
Letter to Patients – This is the letter that is sent to your active patients to inform them you have sold your practice and to introduce them to the new doctor, who is a wonderful person. This is split between the seller and buyer. An average practice may have 1,000 or more active patients. You can typically get the letters printed and mailed for $1.50 to $2.00 including paper, postage, stuffing envelopes, etc.
When the dust has settled and the ink has dried on the agreements, you should walk away with approximately 70% of the proceeds in your bank account after all fees have been paid. As always, we advise you seek advice from your team experts before making the decision to sell your practice.
The Benefits of Practice Ownership
By: Kim Ford
In today’s market, we encounter fewer veterinarians coming out of veterinary school with the ambition to own and operate their own practice. Several new graduates are lured into a false narrative believing practice ownership is not a career option that would benefit them financially or in their goals to achieve work-life balance in their chosen profession. In truth, there are multiple reasons why a veterinarian may choose to own and operate their own clinic.
One is versatility and flexibility, practice ownership allows a veterinarian to make their own schedule, creating a greater work-life balance. You also have the flexibility to choose your staff and adjust the work schedule in the practice to maximize your time.
Secondly, independence in owning the practice allows the veterinarian to practice medicine the way they want to practice without outside influence. The veterinarian chooses their staff, creates the schedule, and controls pricing and services offered. These are only a few of the items but having freedom of ownership can be extremely rewarding.
Building on the rewards of flexibility and independence, most veterinarians find owning their practice fulfilling and take pride in ownership. They take pride in the client relationships they can build within their community. It is very satisfying to be able to practice medicine the way you choose and structure your practice according to your vision.
Last, but not least is the financial aspect of owning your own veterinary hospital. There is a greater increase in income potential that comes with practice ownership. A veterinarian’s annual income as a practice owner is much higher than working as a salaried employee. Additionally, practice ownership creates a sellable asset when a veterinarian feels it is time to move to another project, career choice, or retirement.
These are some of the positive aspects to practice ownership. Ownership has its challenges. These challenges begin with financing the purchase or start-up of the hospital or clinic. Despite this hurdle, there are several financing options available to qualified veterinarians. There is the task of managing staff and resources, marketing, and other entrepreneurial duties outside of practicing veterinary medicine. These challenges require work, but they are not as daunting as they initially appear. The rewards that come from ownership are worth the work that goes into the initial investment and organization.
Read MoreMaximizing Practice Price
Maximizing Practice Price
By: Bruce Johnson, DDS
If you are considering selling your practice, always try to plan at least three to five years prior to the date that you hope to sell. We would all love to obtain the maximum price for the sale of our practices and I have listed some major points to help you achieve that goal.
- Do not take your foot off the pedal. It is very common for those getting ready to sell to start slowing down by taking more time off and decreasing the working hours. Anything that decreases your overall production will result in a decreased value for your practice.
- Try to keep your existing staff happy and motivated! You may want to consider pay raises or bonuses. I feel bonuses based on production level would be best rather than just hourly pay raises that the new buyer would need to maintain. If it is out of the standard range that may not be viewed favorably by a new buyer. Also, I do not recommend sharing your plans to sell with the staff. People are often afraid of change and sharing your plans too soon could cause some staff to start looking elsewhere. Staff turnover prior to a sale is not something a new buyer wants to see. Your plans to sell should only be discussed with your broker, your immediate family, accountant, and attorney.
- Clean up your accounts receivables and eliminate all credits. Stay on top of collecting from both patients and insurance companies. Call those patients with outstanding balances and do everything you can to collect monies owed. Run your credit balance reports and reach out to patients to whom you owe money. You want to keep clean credit balance reports and stay current on your state’s process and procedures for unclaimed property.
- Make your practice look attractive. Fresh paint, nice carpets, and new or recent countertops. Clean out storage areas and move your personal belongings to your home or to a storage facility. The outdoor landscape needs to be attractive. So, consider a landscape company to help. Make sure your outdoor signage is visible and clean.
- Do not buy expensive dental equipment like a CEREC or a Cone Beam CT because you will likely not recover that investment. But do make sure you have the basic equipment that buyers want. Most everyone expects digital x-rays so consider updating to digital technology. An existing dark room with dip tanks will be viewed less favorably. Evaluate your office computer system and software. Your broker will be happy to provide guidance and best suggestions if some of your systems and office equipment are dated. Make sure handpieces are all in good working condition. If dental chairs are over ten years old, considering having them reconditioned. Buyers will often decrease their offer to allow for major updates.
- If you are leasing your place of business, make sure your lease is current and has at least seven to ten years left with options. Banks will not loan with a weak lease structure. For example, if your lease expires five years from now, be sure there is at least one or more five-year options. The lender will need to assure the buyer can remain in that space for the life of the loan.
- Review your fees and make sure they are in the normal fee range. If they are too low, you should work on increasing them to the normal fee range for your area.
- Review your overall office overhead costs and try to get all categories into the standard range. Avoid running personal expenses/vacations through your practice. Your practice should reflect the true expenses of running the practice. Accountants have ranges in each dental category that are standard in general dentistry.