Selling a Practice

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:

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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!

9. 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.

10. 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.

Typical Concerns of Sellers

Typical Concerns of Sellers

By: Megan Urban

Most dentists may only buy and sell a practice once in their career, so it’s nearly impossible to know what to expect. You may have a few friends that have done it, but like wisdom teeth removal or birthing a baby, you will hear some wild and crazy things that may not be entirely accurate. We’ve helped dentists with hundreds of practice transitions and are happy to share what realistically happens. Below are some of the standard stresses that sellers have shared with us in the past so you can become oriented and keep positively moving forward.

Where do I start?

Talk with your broker or transition specialist so we can learn about your specific situation and discuss how we might help.

Do I sell my building or condo with my practice or later?

In most situations we recommend selling the real estate at the same time that you sell your practice. You will get the most value for your space if sold to a dentist and an empty dental space is difficult to sell unless you own oceanfront property. We also don’t want the new buyer to lease for a few years, then relocate and build a practice in a new, high-tech facility. Depending on the cash flow of your practice the buyer may not need a downpayment on the real estate portion, but if so, typically you as the seller may decide to carry that note.

Should I update my office and get new equipment?

If your office looks like it’s from 1985, let’s discuss if getting new carpet and paint may be worthwhile. If all your chairs, x-ray units, etc. all still work, we may want to wait and let the new dentist purchase what they want or need. Typically, banks will loan additional funds to cover any mandatory equipment the buyer needs to sit down and produce at least what you have been producing.

Do I have to sell to a large dental services organization?

You can sell to any buyer you determine is the right fit for you, your patients and team. Often large groups want you to stay on and work for a few years and meet production goals. They typically pay you a certain percentage of your practice sales price at the time of the sale and pay out the rest over a negotiated term. And for the record, we don’t know any groups paying 5-10% EBITDA. This thought is out there and the only way you may get there is if you count the amount they pay you as a provider for years, not truly the purchase price. Any practice must pay you for your work. I know there is a lot of concern about the large dental services organizations, and they are here to stay, but we still sell to many private practice dentists.

Should I tell my team I plan to sell?

We don’t recommend it because they typically get anxious and look for another job. I have had times where the dentist was not comfortable with waiting, and we figured out a way to present this to the team and retain them.

How do I know how much my practice and building are worth?

We can do a complimentary quick look and give you an idea of what your practice is worth. We can also complete a full valuation of your practice if you would like. If you list your practice with us, a Practice Prospectus will also be completed that we provide to potential buyers. When selling the real estate, we also complete a Brokers Price Opinion. With this information we determine both the price of the practice and the real estate together. You have the opportunity to look at offers provided by any potential buyers.

Can young dentists get money to purchase my practice?

Dental-specific lenders understand dentistry and if the cash flow supports the sales price, they will loan the full practice amount and usually provide around $75,000 for working capital. The banks understand that young buyers have a large amount of student debt.

How do I get sales documents?

Your dental attorney will draft those documents and we can provide you with some recommendations for dental-specific attorneys. Your attorney will provide guidance and ask questions to help complete the appropriate documents for your situation. We always strongly suggest that the buyer work with a dental-specific attorney as well so that everything goes forward in a timely and correct manner.

How long will it take to sell?

On average it may take 6 months to a year. Depending on your profitability and location, it may be faster, or we’ve seen it take up to three years. Young dentists typically like to make at least $250,000 or they may consider staying at their associate position for the same income and little responsibility. Buyers love to be able to add services, so if you are a few years out from selling, consider making your own codes to bill out regarding referrals to each specialist.

Is it mandatory or optional for me to stay on and work?

There are always options. If you provide services the buyer does not, you may need to stay on until the buyer can learn to take over these procedures. If you want to work, it’s something to discuss. The buyer may not want to work as much, and you can negotiate staying on. The Lender may not allow it if the cash flow is too low. The buyer may need all of the production to pay the loan. Sometimes we see sellers stay on for a while or cover vacation or maternity leave. If you are in the office providing services, you need to be paid and the attorney will write an Employment Agreement.

How do I sign sales documents and get paid?

Typically, final documents are signed electronically, and escrow helps facilitate this. Escrow will also look at items such as personal property tax, utilities, etc. and do a proration of those amounts, and the final amount owed to you can be sent by check or electronically deposited into the account of your choice.

Like anything you don’t do on a regular basis, selling a practice can be stressful. Rest assured that all your trusted dental advisors, broker, CPA, and attorney, will proactively guide you through the process. Each transition is truly unique, and we deal with issues that arise and help you to obtain your goals. Give us a call so we can understand your specific situation and what next steps may be best for you and your family.

Preparing For The Emotional Roller Coaster When Selling

Preparing To Sell My Dental Practice

Preparing To Sell My Dental Practice

By Megan Urban

Selling your practice can be a difficult decision to make for many reasons. Perhaps you aren’t ready to stop treating patients but want fewer headaches. Perhaps you don’t know where to start or how the process works. Start today by contacting us to provide you with years of experience to bring you comfort and understanding. Below are a few things to consider.

You can start by having us provide you with the potential value of your practice, without the cost of doing a full valuation. We can do the same for your property if you own it. These potential prices will assist you in working with your CPA and financial planner to determine what your retirement cash flow looks like. Be prepared to pay off any debt on the practice at the time of closing. Debt could be from recently purchased equipment or any loan you may have taken out against the practice. If you lease your space, please review your lease.

Start thinking about whether or not you want to continue working a bit. You may not be able to stay on at your office if there is not enough production for two providers. Perhaps you want to work at the dental school or cover for your friends when they are on vacation or sick. These important issues will need to be included in the purchase and sale documents if anything is outside the standard non-complete.

If you have a family member working in a main position in your practice who will be retiring as well or leaving the practice, consider options. We can discuss if it makes sense to hire and train someone new and if the wages you pay family are inflated, we need to consider that in the expenses and adjust potential income to a new buyer. The family member may also be held to a non-solicitation agreement or the like.

Preparing to sell also includes us looking at your dental software reports and tax returns. If dental reports don’t look accurate, they may need to be researched. If you refer out services, please start tracking this so we can provide a buyer with potential immediate increase in income if they can keep the services in-house.

Please look at your credit balances. Some dentists are surprised to see how high those balances are, and they will need to be addressed. It may be an error you can fix, such as unposted treatment or incorrect insurance adjustments. If it is truly a patient credit, get the patient in for an exam, cleaning, or any incomplete treatment. Any credit balances at closing will be directly reduced from the sale price.

If you have a lot of old accounts receivable, determine what needs to be written off, such as old accounts receivable that you know you cannot collect or family members that you don’t intend to charge. Accounts receivable are often purchased separate from the practice sale and aging amounts are reduced. If you allow monthly payments in your office and the patients are up to date on payments, you may decide to not sell these or negotiate for a higher price for this specific piece of accounts receivable.

Now may not be the time to get all new equipment if you are preparing to sell, but it may be time to shape up a few things. If you do not have digital x-rays and electronic charts, consider investigating the cost and process to determine if you want to take that on or not. We can discuss if painting or other minor aesthetic changes might make sense. Decluttering is always encouraged!

If you have a website, be sure to increase Google reviews. This is important to new young buyers.

Please do not tell patients and team members about potentially selling. We can discuss the timing of this for you and your specific situation.

If you are considering selling, let’s schedule a time to talk about the general process of selling your practice and how we are different in our approach to representing you and your best interests.

The Short List Before Selling Your Dental Practice

by Megan Urban, Practice Transition Advisor, Omni Practice Group

There are many steps to selling your practice and your trusted advisors are here to help. Right now, I want to address just a few items that many dentists don’t think about and that can lead to surprises.

Contact your CPA and/or Financial Planner regarding the following items:

1. Are you financially prepared to retire? Your transition specialist (broker) can assist you in determining the potential price of your practice and your real estate (if any).
2. Depending on your entity structure and past depreciation, what taxes will you owe?
3. Depending on your state, what taxes will you owe?
4. If you have any debt against your practice or real estate the debt will be paid at closing from your sales proceeds
5. What will you do with the final funds? Do you have a retirement plan to maximize or does a 1031 exchange on the real estate make sense for you?

Again, there are many steps to selling your practice, but please address the above items to help reduce surprises.