Selling Your Dental Practice? It’s Not as Easy as It Looks
ARE YOU READY?
You might be saying, “This practice has been my baby and my life for many years,” Or, “I still want to treat patients a couple of days a week after I sell my practice.” Before you make any decisions, ask yourself some questions:
- Am I emotionally and financially ready to step away from the practice where I’ve invested so much of my time and resources?
- What do I want to do after I sell? Will I retire from dentistry, work part-time, or volunteer my services?
- How do I want to sell my practice? For example, should I sell to an associate and immediately retire, or should I transition to another dentist and gradually step aside? Should I sell to a corporate?
It’s understandable you want to preserve your practice legacy while ensuring the ongoing care of your patients and staff meets your high standards. That’s why it’s important you find the right buyer to entrust your “baby.” It’s one thing to be financially prepared for retirement. It’s a whole other ballgame to emotionally handle walking away from your practice.
READY, SET… GO!
After taking stock of your personal finances, retirement, and practice transition goals, it’s time to call in the experts to help you prepare for the sale. Your team of professionals should include a CPA, wealth management advisor, practice transition specialist, and an attorney.
Certified Public Accountant (CPA): A CPA will compile and review all your financials. Be upfront about anything that might be considered outside the normal scope of dental practice business, i.e., expenses above industry averages, any non-cash benefits, or family members on the payroll who don’t work in the office. This allows your CPA to do a thorough analysis and advise any necessary adjustments.
Wealth management advisor: The sale of your practice could be the single biggest contribution to your retirement fund. Consult an expert wealth management advisor to help you plan for any related tax consequences and long-term investment strategies.
Practice transition specialist: A good practice transition specialist will review market prices in your area, establish a practice sale timeline, conduct a comprehensive practice analysis, and have a pool of financially viable buyers. Get recommendations from colleagues and interview each one to find the best match for your needs.
Attorney: Attorneys provide much-needed protection and attention to practice sale transaction details. Due diligence and sound legal advice benefits you, your practice transition specialist, and the buyer. Find an attorney who is well-versed in dental practice transitions. This will save you time and money, and potentially add tens of thousands of dollars to the purchase price of your practice.
FINANCIAL PREPAREDNESS
Be sure to have all of your financial statements in order to accurately show the fiscal health of your practice. Make sure you prepare and review monthly and quarterly profit and loss statements with your accountant. If you have not done that, start doing so immediately. Review each line item to manage revenue fluctuations, expenses, and ancillary accounting issues.
The ADA, a member of the Academy of Dental CPAs, or a transition specialist can give you current industry averages for revenues, expenses, new patient flow, fee schedules, and much more.
Buyers will look at your profit and loss statements to compare each line item to industry averages. Make sure your CPA explains any noted differences upfront, otherwise you could lose significant value to your practice. It also puts to question the integrity of your practice financial information.
- Due diligence: Potential buyers will want to review your production against industry averages. Carefully analyze the following key reports generated by your practice management system:
- Provider summary report: This report actualizes productivity by provider and type of procedure. When reviewing this report, make sure your hygiene production numbers are within industry averages. Also, if you offer specialties such as orthodontics or sleep apnea, you need to make sure any potential buyer can replicate those procedures. If they can’t, it could negatively impact the purchase price of your practice because that revenue would be deducted from the valuation.
- Accounts receivable report: Buyers pay close attention to the percentage of receivables based on the delinquency bucket. Be forewarned: most buyers will not pay for balances over 90 days. Large account receivable balances are a red flag for any potential buyer. It usually signifies a lack of controls for effective practice collections and cash flow management. Carefully analyze each account and make the necessary adjustments to non-collectibles.
- Fee schedules: Review your current fee schedule and adjust fees to the minimum 80th percentile for your area.
FINAL INSIGHTS
- Carefully vet all potential buyers. If they don’t have a clear understanding of the market and how it relates to the value of your practice, move on.
- Establish relationships with industry professionals. Their expertise and support will be an invaluable resource.
- Determine a specific date of sale with a realistic timeline. Communicate clearly when you want to stop practicing dentistry.
- Plan early and anticipate delays. Your location, mix of procedures, and practice revenue trends can impact the pace of your practice sale.
Not All Valuations are Created Equal
Rule of thumb valuations are ones that are typically quoted and overly abused. The typical rule of thumb in a dental practice is a value based on a percentage of the practice’s gross collections. For metropolitan areas, the rule of thumb can be from 85% of collections up to 100% of collections. For a rural area, the value is typically 65% up to 85% of collections. Sounds simple and straightforward, but is it accurate? There are several reasons it is not.
The first reason is the practice may have a good gross production number, say $800,000, but it also may be mismanaged with a high overhead of $750,000, leaving $50,000 leftover for debt service and salary for the doctor. Do you want to work for nearly nothing? Using a rule of thumb approach, this practice would be valued at between $700,000 and $800,000 if in downtown Seattle or Portland. The problem is that it doesn’t cash flow enough for bank financing. Secondly, you don’t know what is being run through the gross revenue production number. Is the practice on capitation plans, DSHS, or another low reimbursement program? Low reimbursement means low money to the practice, narrowing the margins. If you get a high volume of the low reimbursement programs, you can bump up your gross and leave little to pay off debt and doctor’s salary.
Another valuation method that can be dangerous is called the cash flow method. This method calculates an adjusted cash flow to the practice. The valuator will then normalize a doctors’ salary and calculate a value based on how much debt the practice can afford to pay. In some practices, the valuator will use a forecasted number to get the value even higher. This helps the seller when selling a practice, but is bad for the buyer, as he or she is stuck paying a high debt payment each month.
Omni follows standards set by the Institute of Business Appraisers and the Society of Certified Public Accountants Certified Valuation Analyst program. We have an Accredited Business Appraiser on staff as well as two Certified Valuation Analysts. We use three different valuation methods to determine the value of a practice – the Production Acquisition Method, the Capitalization Rate Method and the Book Value method. Each of these methods focuses on a different aspect of the practice. After we calculate all three methods, we blend them to determine the total value of the practice. Blending these methods gives us a value that looks at the assets, cash flow and overall collections of the practice – a full picture of the entire practice and not just a glimpse of one aspect of the practice.
If you are interested in hearing more about Omni’s Practice Valuations, send us an email or give us a call today – 877-866-6053.
Want to Sell Your Practice in 2-5 Years?
Broker/Production/Collection Consultant, Omni Practice Group
If you are considering selling in a few years, contact a broker now that has lots of dental experience and can assist you to prepare. You may want to continue the way you have until you sell, but if you have any interest in doing a few things to secure a higher price and have a desirable practice to buyers, continue to read.
There are usually a few easy ways to increase collections which gives you more money now and in the future at sales time. No, you don’t want to do an expensive remodel and purchase all the new equipment and technology available, but you do want to have up-to-date flooring and paint, and good curb appeal. You can determine your new equipment options with your favorite rep if yours is really old and not functioning properly. A new buyer needs to be able to come in and start producing immediately without shag carpet and 1970s decor.
When did you last update your PPO and UCR fees? The last thing a bank wants their new buyer to do is to raise fees immediately and risk losing patients. Confidently set your fees now based upon your skill level and overhead. Patients expect to pay for quality care and by simply adjusting your fees you could add tens of thousands of dollars.
What is your patient retention? If you’re not looking at this and providing tools to your team to be successful, you could be losing patients without even trying! One easy way to calculate this is to determine if about 2 times 85% of your active patient count equals the number of adult and child prophys and perio-maintenances in the last 12 months. So, if you have 2,000 active patients, you should have completed around 3,400 of codes 1110, 1120, and 4910 in the year. How full are your hygiene schedules in 4 months, 5 months? Ensuring every patient has their next hygiene appointment can increase collections by tens of thousands of dollars and it means you are providing ideal care.
Have you spoken with your CPA and/or financial planner? It’s important to have a plan for the money you will get from the practice sale. There are retirement plans that allow you to put much of it in tax-free, but either way, you will want to get a tax plan together to try to ensure you pay off any debt in a way that makes sense, save as much in taxes as possible, and put your money in the right “place”.
Your CPA and/or financial planner will assist you to determine if you have the money needed to fully retire. If you decide for financial reasons or you’re having too much fun to quit completely, determine if your practice can provide enough patients/money for 2 dentists. The banks will want to know that the new buyer is making enough to pay off the practice debt and feed themselves and family. Do you want to do what it takes to increase new patients? Will you be dropping days? It’s also time to think about how you will truly feel “sharing” your practice. You will not be the owner and you will be living with a new roommate in the space and practice that you created and lead for years.
If you don’t want to make any changes as you practice for the next few years, that’s certainly your choice, but don’t expect your practice price to be higher than reality dictates. If your collections have decreased, banks will want to know why. If collections decrease, ensure spending decreases appropriately as well, such as team payroll and dental supplies. A good dental practice broker can assist you to transition out of your practice in a successful and smooth way. This is a very important time for you and your family.
Broker versus No Broker
Broker/Production/Collection Consultant, Omni Practice Group
Thinking of selling your practice but don’t want to pay the broker’s commission? Think again. Do you ever refer out procedures because you know the specialist has more experience, may get a better result, and take less time? History shows that any time you sell your business and/or real estate yourself, the chance of failure of the transaction is over 50%. A 7-10% commission will be much more digestible than the result if you try to do it yourself. I receive calls from senior dentists stating they sold their practices and took payments and it didn’t work out. After one year, they often must take the practice back and struggle to resurrect it to try and sell again. This is typically an experience that is new to both buyers and sellers. It takes time, marketing expertise, sales experience, buyer and advisor contacts, and lots of patience.
Your broker may spend hundreds of hours on your transition and your time is better spent at the chair and planning your retirement agenda. Brokers do lots of specialized marketing which can be costly and time-consuming, and it includes many weekends and evenings meeting with potential buyers. When working with a broker, the average practice sells in about 6 months so selling it alone can be much longer. Your broker should have a list of qualified buyers and a real estate license. If you own your space, it’s critical to sell the building at the same time or get a solid agreement together for future purchase. Time and time again we see senior dentists sell the practice and lease the space with a loose agreement and lose their renter. The buyer decides they like a newer building down the street and leave you with an empty dental building.
A good broker will determine the value of your practice and there is much that goes into this process. It’s not just about collections. Everyone’s goal should be to sell at a fair price in a timely manner. If the price isn’t “right”, the banks won’t finance, and you certainly don’t want to carry the loan. If you get pressured to sell too low, which we often see, you can lose tens of thousands of dollars. Brokers spend a lot of time working with all the trusted advisors you need such as dental specific banks, CPAs, and attorneys to determine the value of your practice and facilitate a smooth and successful transition.
Why Practices Don’t Sell
All practices are not created equal. We list several practices each year that for one reason or another, do not sell. It’s a frustrating experience not only for the seller, but for us as a broker. Here are some reasons that your practice may be difficult, if not impossible, to sell, and how to avoid not selling your practice.
- Your overhead is too high. Practice buyers and their supporting cast of CPAs, bankers, etc. want the practice to not only support the debt it’s going to incur, but also pay the buyer a minimum salary. The ratio the bankers look at is called the debt coverage ratio. Most of the time, they want to see the debt coverage ratio of 1.2 times to 1. That means for every $1.00 in debt payment, they want to see $1.20 of net income to cover the amount borrowed.
How can you improve this, so you have a good debt coverage ratio? Make sure your overhead is under control. The national average overhead is 65%. You should be at, or below, the overhead level of 65%. The preference is to be below the 65% overhead mark. Go through your expenses with your accountant or consultant and figure out how to improve your overhead and cash flow.
- Your collections are going down. Bankers don’t like to see annual collections going down every year. That tells them patients are leaving the practice and seeking treatment elsewhere. It also may trigger a question on the reputation of the practice. Another question may be, “Is all the dentistry done, and there’s nothing left to do?”
You can fix this by keeping your numbers up year after year. At least be relatively flat, but it’s best to grow your practice at least slightly every year.
- Staff overhead/problems. One thing we see often in older practices is that the staff overhead is above the target of 20% to 25% of total gross collections, including taxes and benefits. If you’re way above that, you need to look at both sides of the equation. If an assistant is making $45/hour, or front desk making $60/hr. and your staff overhead is at 40% of total collections, you have a problem that a buyer does not want to inherit.
It’s a tough position to be in, but if you’re a couple of years away from selling your practice and your staff overhead is at 40%, you should either increase your collections considerably by cranking up production, or ask the staff to take a pay cut. If they don’t want to take a pay cut, you may consider letting a staff member go – the buyer will be doing it anyway so you might as well get it over with.
- Lease issues. We have seen practices not sell because there are problems with the lease. Reasons include: the lease being too high, the landlord wants to tear the building down and not extend the lease, the landlord wants the seller to stay responsible for the lease for the entire ownership term of the buyer, or the landlord being unreasonable with proposed new terms.
Negotiate with your landlord when your lease is up for renewal. Add an “Assignment Clause” to your lease. This states that you can assign your lease to a buyer when you sell your practice. At that time, you will be removed from any responsibility from the lease. Also, work with a commercial broker to make sure you are getting current market rates on the lease and not way above market.
- Low Production. Low producing practices, below $400,000 per year, are hard to sell. They are viewed by buyers as a startup practice, especially if there is a downward spiral in the practice. Buyers and bankers want a practice with solid cash flow that they can instantly make a living and not have to work another job as an associate.
Sell your practice when the collections are high. This is the smartest thing you can do in a practice transition. I have seen doctors sell now for $300,000 when they could have sold 3 years ago for $600,000. They lost $300,000 in the purchase price by waiting too long. Remember, just because you sell your practice does not mean you need to stop working. You can always work as an associate.
These are a few things that keep a practice from selling. Be sure and prepare your practice and yourself to sell about 5 years before selling. Call us and we’ll meet with you to give you guidance on what you need to do to your practice to sell 5 years from now. We are happy to help at no cost to you.
info@omni-pg.com
877-866-6053