Preparing Your Dental Practice to Sell
Whether you are approaching retirement age or just thinking about a transition, there are several things you can do to prepare your practice for sale. Doing these things may help eliminate headaches, increase your sales price, or reduce your costs. Here are a few tips:
- Assess your equipment. Upgraded practices sell faster. If you are more than five years away from retirement, I recommend a few upgrades such as digital x-rays, recovering your chairs if needed, and freshening up the paint. If you’re closer than five years, you will not get the tax benefit of major upgrades, so stick to the paint and carpet.
- Clean up your accounts receivable. Reimburse patient credits, collect old accounts and keep the A/R current.
- If you have an associate, make sure you have an associate agreement with a non-compete.
- If you have an employment agreement with your corporation and you are a C-Corporation, you may need to terminate yourself a few years before retiring. Consult your tax accountant.
- Consult your financial advisor and tax accountant. How much do you need to retire? How much do you have? What are the tax consequences?
- Get a practice valuation to see what proceeds you will get from the sale.
- Be realistic about the time it takes to sell. In remote areas, it can take a year or two. Metro areas, much less.
- Keep your production up as you near retirement. I see dentists slow down all the time in their last few years. Work the same number of days.
- Assess your staff. Do you have too many staff? Do you have one that should have been let go seven years ago?
- Have a practice assessment performed by a qualified consultant. Many will do it for free or for a small fee. This may help show you some areas to improve over the next few years.
By focusing on these items in the coming years as you near retirement, you will avoid having your practice production and thus the price of your practice go down in your later years. Call me for a free consultation. I would be happy to take a look at your practice and give you my thoughts. Or, if you are thinking about transition right now, I have a database of buyers looking in your area.
Points To Consider When Thinking of A Dental Practice Transition or Sale
With the economy somewhat improving I’ve had an increase in Washington and Oregon from dentists asking about practice transitions or a practice sale. While as a broker, I can easily just suggest they do a practice transition, but as someone who wants to have a long career, it’s in my best interest to give existing and potential practice transition clients the best possible advice and tools to make that decision. So, with that, here are a few points to consider when thinking of a practice transition:
- Consult your financial advisor or CPA – Can you afford to retire or cut back? What does your portfolio look like? What income do you need to live off of for the rest of your life?
- Get a practice Appraisal – If you’re thinking about a transition, you need to know what your practice is worth. A rule of thumb will give you a ballpark estimate, but may not be accurate. Have a professional appraise your practice. We charge $2,495 for practice appraisals with a free update on the appraisal if done within 2 years.
- Consult your Tax Accountant on the ramifications of a sale – Are you an S-Corp or C-corp. If you’re a C-Corp, you may want to figure out how to switch to an S-Corp. Do you have an employment agreement? You may want to terminate the employment agreement. Seek good tax advice and counsel prior to a transition.
- How’s your practice health? Are your numbers looking good? Still getting new patients? Is technology up to date? Is décor up to date, or do you still have the olive appliances in the staff room? Consider a remodel if you’re 5 years or more away from retiring. If it’s closer, consider a cheaper update like paint and carpet.
- What are the capital gains outlook? Currently, the Bush tax cuts expire at the end of 2012. There’s another 2.8% healthcare tax also kicking in. Does that make it worth it to sell sooner rather than later?
- Do all “key” employees have non-compete agreements? If you have an associate, that is essential.
- Clean up your accounts receivable. Are there a lot of credit balances? Are there a lot of accounts greater than 90 days old? Clean it up!
- Start planning with your practice Transition consultant well ahead of time. As a practice transition consultant and broker for Washington and Oregon, I can help get things in place prior to your transition.
- Do you own your building? Get an appraisal if you’re thinking of selling it as well. Or, if not, get a market rate on what the lease should be.
- Interview several attorneys who specialize in dental practice transitions on the west coast.
Planning ahead of time and asking these questions will help you feel more at ease when you do decide to do a practice transition or practice sale and seek retirement.
Happy Planning,
Rod Johnston, MBA, CMA
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Transition Planning: Planning to Fail or Failing to Plan?
“Begin with the End in Mind” is habit number two in Stephen Covey’s book “7 Habits of Highly Effective People.” A fairly large number of dentists I have worked with follow habit number 8 that did not make the book. That habit is “End When You Have To.”
In every business and in every goal that you set, you have an end in mind. When you set your New Year’s Revolution on January 1 of getting in shape, you had in mind a fit, toned body at the end. The same goes for a dental practice. When a dentist first purchased or started his/her practice, he or she had visions of grandeur of helping patients achieve top oral health while making a good living. Most dentists achieve that goal. But then, they let the practice go, stop replacing equipment, stop marketing and watch their production and patient base dwindle down losing 20% to 50% of the value of their practice. Money they could have put towards retirement. They end up having to retire vs. planning to retire.
So when do you start planning for retirement? How about now? Especially if you’re within 5 to 10 years of retiring. Here are a few steps to follow to help you plan for your transition:
- Meet with your financial planner to determine how much money you will need to retire. They can help you calculate how much you will need to save in order to maintain your current standard of living while in retirement.
- Perform an assessment of your practice. This would include an assessment of your equipment, technology, procedures, ratio analysis, hygiene, new patients, financial review, overhead, marketing, etc. If you do not have the time or know-how on how to do this, you can either contact me or your Henry Schein representative. Henry Schein has a great tool called the Dental Practice Assessment Tool (DPAT). It points out all the good things and opportunities for improvement in your practice.
- Go over your practice assessment in detail with someone knowledgeable about practice management and transitions to determine your targeted sales price you are hoping to achieve when you transition your practice.
- If you need help implementing improvements in procedures or other recommended areas in your practice, hire a reputable dental practice management consultant. They can help you get to your goals quicker.
- Implement improvements recommended as part of the assessment. If you’re within 7 to 10 years of a transition, it’s the perfect time to update your equipment and even remodel your practice. Having a fresh look will help your practice sell quicker.
- After you have implemented the recommended improvements and tuned up your practice, have an appraisal of your practice performed. I would recommend having one performed every few years as a litmus test to see if you’re getting close to reaching your targeted value of your practice.
By completing these steps and putting a transition plan in place, you will have planned and optimized your transition. You can then transition when you want to instead of when you have to.
Trends in Transitions: Retiring Baby Boomers
What this means to the baby-boomer dentists will be reflected in practice values. Currently, if you live in a desirable area, Seattle, or Portland, for example, you can sell your practice for an average of 75% of the last 12 months of production. (Disclaimer: This is a rule of thumb; an actual valuation should be done to determine your practice’s value). I have even seen practices selling for as high as 100% of production in certain cases. This classifies the current market for practices as a seller’s market. The high percentage is primarily due to the shortage of practices for sale in certain states and prime locations.
Thanks to the current poor economy, there are many baby boomer dentists who were going to retire but have decided to work a little longer while they recover their paper losses in their retirement portfolio. Most dentists assume the sale of their practice will make up 20% of their retirement account. While the baby-boomer dentists hold on to the practice, it is creating an adverse effect on future practice values. Dentists who cannot find an existing practice to purchase are opening their own start-up practices. Also, when the economy does pick up again, there will be a log-jam effect of dentists retiring. This will drive practice values down to at least the national average of 65% of production.
So, if you are holding off on selling your practice to recoup some of your lost retirement portfolio, you may want to do some math to determine if holding on to your practice is the right thing to do. It may be better to sell your practice and harvest the equity while the values and practice are at their peak. You can then work as an associate to continue building your dream retirement, or better yet, retire to your dream retirement spot and live your retirement dream.