Current State of Transitions Market
So, where are we now? In an article I wrote for the Washington State Academy of General Dentists called The Perfect Transition Storm, I explain that we’re experiencing an anomaly in the practice transition market. I have been working with dentists since 2004 helping them transition into or out of a practice. There have been times when interest rates are good, but there are not many buyers. There have been times when the economy was doing well, but not many sellers selling their practices. But, in the past almost 15 years, I have never seen a time when everything aligned so well. Here’s how this adds up:
- The transition market is still a sellers’ market. There are not many “good” practices on the market. Good practices are producing over $600,000 per year with 65% or less overhead and at least 10 to 20 new patients per month.
- Banks love dentists. The default rate is below .0125% for dental practices. More and more, banks have been seeking to lend to dentists to buy practices. Recent offers from some banks include 1.78% interest rate for the first two years adjusting to 4.9% for 10 years after that. The average rate currently is 5.125% on a 10-year term loan.
- The economy is strong. Many dentists I talk to tell me that they are busy. Patients are employed and either has the funds or have insurance to get theirs and their family’s dentistry done.
- Competition for the good practices is up. We are starting to see corporate practices such as Heartland come into the Northwest and other markets seeking out practices grossing over $800,000 in collections. Small group practices are also out there looking for good practices. We also have solo buyers looking to acquire their first practice.
- Practices values are up due to demand for good practices. A typical practice may sell for 70% to 75% of collections in an average market. We’re now selling practices for 5% to 10% higher, mainly due to demand.
Mesh this all together and you get a formula for a good transition market. There’s high demand for good practices. Interest rates are low. Practice values are above normal ranges. If you are thinking about selling within the next 3 to 5 years, it would be prudent to sit down with your financial advisor, broker, or other advisor to take a look at your situation. Timing can be everything and good markets don’t last forever. We would be happy to buy you a cup of coffee and discuss your situation and help put a plan in place to make sure you are in the best position for when it’s time to transition. Contact us today! 877-866-6053.
The Perfect Transition Storm
For those of you that have been around for a few years, you have probably noticed that the economy is cyclical. Factors such as interest rates, employment levels, consumer spending and even retirement rates ebb and flow. This flux creates optimal opportunities to buy and optimal opportunities to sell.
Currently, the market for a practice transition is a seller’s market. This means there are more buyers looking to acquire a practice than there are sellers looking to sell a practice. It has been this way for a number of years. But there are a number of factors that make the current market a perfect storm. These factors are as follows:
- There are not a lot of practices on the market. Low supply and high demand equate to higher practice values.
- Interest rates are still relatively low. This makes note payments more affordable, so buyers are looking to take advantage of lower rates by purchasing a practice.
- The economy is strong. Patients are getting their dentistry done. They are employed and have insurance, or can afford to pay cash and get work done.
- There are more buyers than sellers. Doctors have been holding on to their practices and delaying the sale of their practice in part because of the down market in 2008 to 2010. The average retirement age for dentists was 62 in 2000 – it’s now closer to 67.
Just as perfect storms at some point break, so will the perfect storm for a transition. Interest rates are already starting to increase. Over 50% of doctors are now over the age of 55 and getting older. They are beginning to sell either to retire or, unfortunately, because of health reasons. Seller’s markets are flipping to buyers markets in other parts of the country with older populations. It will eventually happen where you are as well. If you are thinking about a transition within the next few years, we would be happy to meet with you and answer your questions and put help formulate your transition plan. Just give us a call at 877.866.6053 or send us an email at info@omni-pg.com.
Key Items Buyers Look For In A Practice
- Collections – Most buyers want a good base amount of collections. The average practice produces around $500,000 per year. If you’re below this amount, expect your practice to take longer to sell as there are few dentists who want a small practice that they can grow. Most want to buy it, move in and get cash flow from the very start.
- Cash Flow – Buyers want to be able to pay the debt service on the practice and also pay themselves a decent paycheck. If you have an average size practice, your overhead should be at or below the national average of 65%. This is after the “add-backs” that are done on your tax returns which “add-back” those expenses you are running through your practice which are really not operational to the practice.
- Hygiene Recall – A solid recall program should be in place. Approximately 30% of the collections in the practice should be from hygiene for a stable practice. A little less is okay, but the lower you get, the closer you are to running an emergency clinic than a stable dental practice. Not that there is anything wrong with that, you just reduce your pool of buyers if you have lower hygiene production. At the same time, if you have really high hygiene – 40% or higher, that either means your hygienists are awesome and so is your patient retention, or, you’re not doing much in the way of procedures and doing a lot of “watches”, fillings instead of crowns, etc.,
- Digital Technology – While this isn’t a must, most buyers want to see digital x-rays at a minimum. You can still sell your practice without digital x-rays, but expect the price to be slightly lower. Panoramic x-rays are great as the machines are less and less expensive. Digital charts are also nice to have.
- Decent Lease – With the commercial real estate market going crazy, you never know what you’re going to get. It’s good to have a lease term of at least 5 years out with a 3-year option on top. Problematic leases with tear down clauses, little parking, or those with short-term leases and the landlord not willing to extend the lease will cause a formidable problem in the sale of the practice.
- Updated equipment and décor – If you have older chairs, be sure and at least have the coverings in good shape. Older chairs are fine, but torn dental chair covers are not. Dental chair covers are inexpensive. Get new ones if yours are not in good shape. Old carpet, paint and outdated countertops are also a turn-off. A bit of new carpet, paint, and countertops go a long way in making a practice feel fresh and new for not very much money.
- Poor Bookkeeping and Accounting – Have I got stories in this area! However, I’ve been sworn to secrecy. If you’re running your Porsche lease, spouses’ dermatologist appointments, vacations to Italy, or doing anything remotely grey in the accounting world through your practice, STOP! We have had practices we could not sell due to too much funny business going on in the books. Bank credit departments look at the numbers and ask a lot of questions which leads to buyers getting very scared and running away. I’m sure if you have a good accountant, they are following generally accepted accounting principles for your practice and there will not be a problem.
These are just some of the hot items that can quickly turn off a buyer and will give you the best chance of selling your practice. Not being able to check off the box for each of these items does not mean you cannot sell your practice, it just means your buyer pool will be smaller and it will take longer to sell. If you’re two to three years away from selling you can use this as a guideline to prepare your practice to sell over the next couple of years.
2017 – It’s a Wrap
As I look back at 2017, I go through the names of the doctors whose practices I sold and understand a bit more about them. I look at the doctors’ names of the practices and, amongst other things, I think about why they sold their practices. I see names of doctors who sold their practice because they are ready to retire – this is the typical reason for selling. But I also see the names of doctors who sold their practice because they were diagnosed with cancer and could no longer practice. I sold four such doctors’ practices this past year. I also see the names of two doctors, both under the age of 42 who were planning to practice dentistry into retirement, whose practices I sold because they got nerve damage in their hands and wrists. There are also several doctors who sold because they were tired of managing a practice – dealing with insurance companies, staff management and managing their landlords.
Not long ago, I had a conversation with two doctors in their late fifties who both had recent health scares and had family members and friends who passed away from cancer at early ages. This hit home as my Dad passed away in July of 2017 from non-Hodgkin’s lymphoma and my brother was just diagnosed with pancreatic cancer. And as these doctors ask me questions about selling their practices, I remind them that just because you sell does not mean you’re done with dentistry. You can still work as an associate dentist in another practice, teach at the dental school, or volunteer at a clinic. I let them know that I’ve never had a dentist tell me that they sold too early. In fact, many have come back and said I wish I would have sold several years ago because they are loving their freedom of being able to come and go as they please, fill in for vacationing friends, or work in a clinic when they get the itch to do dentistry.
As you celebrate your holidays, try not to think too much about work. Also, as you set your goals for 2018 and do an assessment of your career and life, don’t forget to think about what’s important to you. For some, it may be that dentistry takes priority over everything and it’s your passion. For others, maybe it’s time to turn to the next chapter and enjoy what you have – family, friends, time, giving back, etc. Whatever direction you go, know that we are here for you and happy to provide a free consultation anytime you would like. We’ll even buy the coffee!
OMNI would like to wish you and your family Merry Christmas, Happy Hanukkah, Kwanza yen iwe ha heri, Happy Rohatsu, and CHEERS to the New Year and best wishes for everything you desire in 2018!
Selling Your Dental Practice? It’s Not As Easy As It Looks
I’m sure many of you have sold a car, boat, or a house by yourself. For the most part, cars and boats are pretty simple to sell. Even selling a house only involves a couple of pieces of paper, an escrow agent, and a few other steps. But selling your practice is another ballgame. Emotions get involved as you are attached to your patients, staff, and heck, you built this baby! There is a valuation to do – how do you do that? Additionally, there is due diligence, lease assignment, document preparation, letter of intent, renegotiating after due diligence, closing process, CPA’s and on and on. It’s hundreds of hours of doing a lot of different things.
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 necessary adjustments to non-collectables.
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.