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 MoreThe 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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Selling Your Dental Practice Does NOT Mean You Have to Stop Practicing
Whether you have owned your practice for 40 years, or owned it for 5 years, selling your dental practice does not mean you are done practicing. We often meet with doctors who are sick and tired of managing their staff, doing the bookkeeping, playing games with the government agencies, dealing with the ups and downs of the economy, the changing environment of the profession, and on and on. The doctors are about to crack but think they cannot yet sell their practice as, according to their CPA or financial advisor, are not yet financially ready to retire. We counter this by asking them “who said you need to retire?” You can “harvest your equity” and either work back in the practice or go work for another practice. What the CPAs and financial advisors may not see is that your practice collections numbers are going down. Or, your blood pressure is skyrocketing due to the above-mentioned challenges of managing your practice to the point of a heart attack coming right around the corner. If you have a good amount of equity in your dental practice, we can sell your practice and you can put the cash in the bank and work as an employee until you are ready to retire in 5, 10, 20 years, or as long as your heart desires. Transitioning out of your practice may be the way to enjoy your profession again.
Dental Partnerships
By Megan Urban, Practice Transition Consultant, Omni Practice Group
Dental partnerships can be great or not-so-great. They can include different scenarios: buying a partnership, adding a partner to your existing dental practice, or a start-up partnership. To ensure you have the best outcome, financially and emotionally, you’ll need to consider some important questions.
- Are you friends, relatives, or colleagues with the people whom you are considering entering into a partnership with? Are you convinced you can get along in a work environment?
- How will you resolve disagreements and make decisions regarding advertising, patient care, team management, and acquiring new equipment and technology?
- How will you divide up responsibilities within the practice?
- Is there enough physical space for more than one dentist? Are there enough patients?
- How will you divide up new patients and hygiene exams?
- How are you going to determine compensation, such as 30% of individual collections, then 50% split on all additional income and costs? If one of you performs procedures with much higher lab bills, you may need to consider a lab payment These items will need to be written up by your dental attorney as part of your partnership documents.
- Do your legal documents include specifics on terminating the partnership? You will need to address details regarding non-compete agreements, disability or death, and how to sell a practice when one or both partners are ready.
- Do you know a good dental CPA who can assist you with setting up the entity or entities that make the most sense?
There are many items to consider to ensure that you make the right decision, but we can help make the process go smoothly with the best outcome for all parties. We have guided many dentists through purchasing and selling practices, partnerships, multiple locations, and every size and type of practice. We have the experience and the expertise to help you achieve your goals.
Read MoreSettling Credits Before Listing Your Practice
By Jen Bennett, Practice Transition Specialist
You’ve made the decision to sell your practice, and with that comes the to-do list of tasks that can often feel daunting. One important task that is often overlooked is settling patient credit balances.
What are credit balances and where do they come from?
In many cases, a patient will have a credit on their account when their insurance pays more toward their treatment than anticipated or you estimated a patient portion to be higher than was necessary and collected accordingly. In these instances, patients paid more out of pocket than necessary; therefore, the difference will show as a credit on their account and on your accounts receivable report or unassigned credit report. Credit balances can also result from patients mailing in a payment or making an online payment on a balance that they have already paid. These are duplicate payments typically made in error. When this happens, we recommend contacting the patients and advising them of the duplicate payment before posting it to their accounts. Many patients will request that you return their duplicate payment to them and some will elect to leave the credit on their account if they have upcoming treatment planned. If they have upcoming treatment planned, this can be an effective way to get them on the schedule. It can be difficult to reverse an online payment and, in those instances, you may have to post it to the patient’s account. In other cases, patients may pay upfront for larger treatment plans and due to unanticipated circumstances, they were not able to complete their full treatment, or perhaps less treatment became necessary. If you have a practice where patients with insurance are required to pay their patient portion due at the time of scheduling their appointment for treatment, then credit balances will appear on the patient account until the procedures are posted and until insurance has paid their portion, this is just the normal course of collecting patient portions upfront. The same applies to patients without insurance if you collect the patient portion upfront.
How should I be handling credit balances?
To keep your credit balances at a minimum I would suggest you come up with an efficient protocol with whoever is in charge of your accounts receivable, whether it be your office manager, bookkeeper, or yourself. Credit balances are typically handled by an office manager. It is our recommendation that your accounts receivable report or unassigned credit report be reviewed monthly. If there are outstanding claims on an account, no refund is due yet. If there is a credit balance and there are no outstanding claims, we recommend contacting each patient and advising them of the credit balance. And again, if they have been treatment planned for procedures ask each patient if they would like to keep the credit balance on their account and get them on the schedule for treatment. If they have no upcoming treatment, it is typically best practice to refund the patient as soon as possible to keep your accounts clean. Make sure to document these conversations about credit balances in patient notes. This will serve you well in the long run when reviewing your reports each month for credit balances. Some practices choose to monitor patient credit balances quarterly; however, if you are preparing to sell your practice, we recommend that you do this monthly. You’d be surprised how quickly credit balances add up and how often they are overlooked.
One important note of caution! When reviewing the credit balances on patient accounts, do not assume that the refund always goes to the patient! You want to look back to the last zero balance on each account and look at patient payments made and insurance payments made. Insurance companies make mistakes and sometimes they overpay and sometimes they make a duplicate payment on a claim. In these instances, the refund is due to the insurance company and not to the patient. Some insurance companies catch these errors quickly and request a refund in writing. Others do not catch them so quickly and they have up to a year to claim their refund (this may vary from state to state). Pay attention to this detail when reviewing accounts. Remember to make notes in patient account notes so you don’t have to repeat your efforts every month.
I have not been settling patient credits on a regular basis, I have thousands of dollars in credits now what?
Follow the detailed recommendations above and get your accounts with credit balances cleaned up. It is essential to do this leg work prior to the sale of your practice. Make every effort to contact your patients to refund any monies due to them. If the refunds are due to insurance company overpayments, contact them and ask that they send a request for refund letter. If you are unable to reach patients with credit balances due to them, these credit balances in many states must be reported to the state in which your practice is located. For example, in the state of Washington, credit balances over a certain dollar amount must be documented on an “Unclaimed Property Report” and filed with the state before November 1st each year. Do some research and find out what your state’s unclaimed property reporting requirements are.
*Disclaimer: The information above is not legal advice. Each state has its own rules and regulations. Be sure to review all rules and regulations as circumstances may vary.
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