Frequently Asked Questions for Dental Sellers
By Do I have to pay out my staff vacation and sick time at closing?
Yes, after the sale has closed, you will write a check for accrued vacation time to your staff members. The staff will then start accruing vacation and sick time under the new practice owner.
Paying out sick time depends on your individual state laws. Some states have recently implemented mandatory sick time. Some of the new state laws may require the employer to pay out accrued sick time to terminated employees. Selling doctors may feel generous and go ahead and pay their staff accrued sick time at closing even though the law doesn’t require it. That is the personal preference of the seller.
Be sure to check your employee handbook and if it states that an employee is paid out for accrued vacation or sick time, then you must pay it out no matter what the law says. Employees can file a court action against you to get their accrued and earned time paid.
When should I tell my staff and patients about selling my practice?
In general, you do not want to tell your staff about selling your practice until the documents are signed. People are averse to change and if you have staff members that are already thinking about another job opportunity, then you may lose them if you tell them that you are selling your practice.
However, that being said, if you’ve had the same staff for 30 years and they are like family to you and would be upset if you didn’t tell them, then it is really up to you if you’d like to tell them or not. If you trust they will be loyal and stay on, then it may make sense to tell them.
When to tell also applies to your patients. About the same time as you tell your team, a letter approved by the buyer should be ready to go out to your patients. We have examples of these letters for your use. Patients want to know a little bit about the new dentist and that you and your team all trust and respect the new dentist. Depending on what you desire, you may want to host an open house at the office, invite your staff and patients, and as additional marketing, invite local residents or businesses.
If my family member also works in the practice and wants to retire at the same time, will that be a problem?
It’s not a major problem but expect the potential buyer to ask your family member to at least stay on for a transition to a new employee. For example, if your wife is the front desk person, the buyer may want your wife to help train a front desk person for three to six months to ensure the success of the new person.
Will I be required to stay on and work on patients as part of the transition process?
Every transition and every buyer are different. Larger transitioning practices with higher volume production may ask you to stay on and work in the practice. Especially if there is enough production for another part or full-time doctor. For smaller transitions under $800,000 or so, the buyer may ask you to stay on for a couple of months, or at least to be available via phone or e-mail to answer questions about patients, staff, etc. We have found that after a couple of weeks, buyers typically realize they have things under control and will then let sellers know that they are free to fully leave and enjoy whatever their next chapter brings.
Do I shut down my corporation at closing?
There will be some bills to pay after closing and some other “clean up” of the books, so we recommend you leave your corporation open for six months to make sure everything is taken care of. If you have an accountant, let them take care of closing out your corporation.
What are the taxes owed at closing?
It depends on the state, but there will be a final personal property tax bill that you will need to pay. If you are using escrow, they will take care of that. If not, you can contact your tax authority or accountant and they can help you calculate what is owed. There may also be a proration where you pay part of the personal property tax and the buyer pays the balance.
For income tax, there is a final income tax bill to pay. It’s due on April 15 and paid as normal. Your accountant will fill out a “Final” tax return and inform the IRS that you are dissolving your corporation. The state you live in will also need to be notified that you have sold your assets and dissolved your corporation.
Can I slow down the production the last few months before the sale?
Argh No! Keep your production up and going — business as usual. One of the worst things you can do is to have production go way down the last few months and have the lender come back and ask for current reports. They’ll see the drop in production and question if the practice is now worth what they valued it at. They may ask you to lower the price. You can relax after the sale closes.
What is included in the sale – Equipment, Goodwill, Accounts Receivable, Cash in the bank, all my personal possessions in the office?
What you are selling is the goodwill of the practice and the equipment used to produce the dentistry you have been doing over the years. Standard protocol is 75% to 80% of the purchase price is allocated to goodwill, $5,000 to $10,000 towards the non-compete, and the remaining to equipment. Accounts Receivable are typically sold in addition to the practice assets as a separate sale. Personal possessions are excluded from the sale, as long as they are listed in the exhibit in the Purchase Agreement.
Should I sell my Accounts Receivable to the Purchaser, or keep it? At what discount is the Accounts Receivable sold?
The majority of the time, we recommend that you sell the accounts receivable. The sales price for the accounts receivable, which is in addition to the practice sales price, is 85% of the accounts receivable balance less insurance and other discounts and less any credit balances on accounts. Another method is 90% of the accounts less than 30 days old, 75% in the 30 to 60-day-old bucket, 50% for the amount that is 60 to 90 days old, and 5% for anything over 90 days old. If there are patients on payment plans, then those may be excluded from the sale, or may be included depending on what is negotiated.
If for some reason you decide to keep the accounts receivable and collect the balances yourself, you will pay a collection fee to the purchaser of 5% to 10% depending on what you have negotiated.
Note: Attorneys state that accounts receivable disputes when the A/R is not sold is the number one cause for potential litigation. It’s simply cleaner and easier if the seller sells their A/R.
How long does the sale of my practice take?
The amount of time it takes to sell your practice is dependent on a number of factors. The first factor is how much you are producing. Higher producing practices tend to sell faster than lower producing practices. The second factor is what type of practice you have. General dentistry, endodontic, orthodontic, and pediatric practices all tend to sell consistently faster. Periodontal, cosmetic, and prosthodontic practices tend to take a while to sell. Oral surgery practices take the longest to sell. Sometimes several years. The third factor is whether you are in a small rural location or an urban setting. Practices located in small, remote towns tend to take a while to sell. They can take anywhere from one to two years to sell. If production is low, they may not sell at all. The more urban the practice, the higher the likelihood of the practice selling quickly. Lately, we have seen that practices within 30 minutes of a metropolitan area are selling better than practices directly in a metropolitan area. The final factor is how many operatories you have. A three operatory practice will take longer to sell than a four operatory practice. For some reason, young buyers seem to think they need six to eight operatories to run a practice. We try to educate them that four is plenty, but they listen to people on Dentaltown, or consultants, or other forums that make blanket statements that you need six to eight operatories. They don’t realize that the more operatories you have, the more rent you will be paying. Three and four operatories are just fine.
With those factors in mind, here are some general “rules of thumb” time frames. A practice in a metropolitan area, or within 30 minutes of a metropolitan area will sell in approximately six to nine months. Some sell faster, some sell slower. Again, size of the practice matters. A rural practice will take between twelve months to twenty-four months to sell.
Should I sell my building?
Do you want to be a landlord? Can you get a better return on the proceeds somewhere else? Is the current real estate market hot? Can the buyer afford to buy the building now? These are the questions to ask yourself. In the current market, we have been getting higher than market prices on real estate because a building is worth more to an owner-user than to an investor. Owner-users would rather pay themselves rent than pay rent to someone else. Thus, they would pay a premium to purchase the building they will be occupying. The final thought is do you want to take the risk of tenants leaving the building to go buy their own building and rendering your building vacant?
Selling empty dental buildings can be nearly impossible and it is worth more to the buying dentist. Perhaps if your space is right on the coast or downtown you may have options, but potentially still difficult and you may be offered less because any other business will need to do considerable remodeling. It can take up to twelve months or longer to lease a commercial building. If you have a specialized building like a dental office, you more than likely need to find a dentist to fill the space again. That might be a challenge. In a nutshell, if it’s a good market, I would suggest selling the building.
What if I want to stay on and work a day or two a week?
This may be possible if there is enough production/collection for both of you. The buyer and the lender will need the buyer to get the production in order to pay the loan and everyday life expenses. You may be able to stay on if you perform procedures that the buyer does not perform. You can talk about and make a plan for ways to increase collections. If you work back you will need to have a compensation and employment agreement negotiated and in place.
How is the sale price determined to market my practice (and real estate)?
We work with you to gather the last three years’ practice financial information and then have our certified CVA’s put together a valuation of the practice using three different methods, which are weighted and averaged to determine the market value of your practice. The valuation is then reviewed with you to gain a final agreement on a listing price.
The real estate price is determined somewhat like a home or any commercial real estate by reviewing comparable real estate in your area. Once we determine the potential listing prices for your practice and real estate, we consult with you and set a final price.
What if I run personal expenses through my office and pay my kids who don’t hold a position?
The cleaner your books are the easier they are to understand and if they are too convoluted, some banks won’t trust the numbers and won’t lend the money. We expect some “adjustments” to expenses and income, you just need to let us know what these are.
Should I remodel or get new equipment before selling?
If your office looks like 1975, consider updated paint, flooring, and décor, but nothing over the top that is expensive or makes it unsettling to the average person. If your equipment is really old, talk with us and we can help you determine if anything needs to be updated or replaced.
What do I do with all of the proceeds from the sale of my practice and building?
Please remember that anything you owe on either the practice or the building will have to be paid at closing. Talk with your CPA and financial planner to help you determine the best investment options. You may have a retirement plan in place that allows you to sock away a lot of money and is tax-free. If you have another business or like being a landlord, you can discuss a 1031 exchange with your CPA. You will have to pay taxes, but perhaps you can reduce them by strategizing with your advisors.
How can I increase the value of my practice?
If you are thinking about selling your practice in the next three to five years, you can review and make strategic decisions to increase the bottom line to increase the value. Some basic improvements would be to increase the number of new patients and production, and hold off on any major purchases unless necessary to maintain the current day-to-day operations. Enhance the appearance of the office and clean out any old clutter. If you are ready to sell within the next twelve months, it is hard to increase the value of the practice because the value is based on the last three years of practice financials. The most important thing if you’re ready to sell now or in the next twelve months is to maintain or increase the practice’s production. New buyers and banks will be reviewing the practice reports to verify if the practice is holding steady or if the numbers are declining.
Are non-compete clauses in a purchase and sale agreement enforceable?
Yes, when written correctly they are. Always consult with your legal professional on any enforceable non-compete questions.
Should the Seller and Buyer have an attorney or an accountant/CPA involved?
We strongly recommend that seller and buyer each have their own professional attorney and accountant/CPA for advice on legal, financial, and taxation matters. Typically, the broker involved can make a recommendation of a dental professional if you don’t have one.
Should I use a Dental Broker?
After many years of hard work and investment into building a dental practice, you’re now thinking about selling the practice. It is easy to assume that the practice will sell quickly and for a great price when you are ready to sell. Selling a dental practice is not like selling a home, it is a complicated process. Determining the market value of the practice, showing the practice, finding the right buyer, negotiating the purchase price, drafting the asset purchase agreement, formulating the transition plan, negotiating the lease assignment, and obtaining practice financing are just a few of the key areas where a potential practice sale could become derailed. The expertise, experience, and guidance of the Omni Practice Group brokers can prove to be invaluable. Using a broker will typically save you a lot of time and money in selling your practice.
Read MoreSettling Liens Prior to Listing Your Practice
By Jen Bennett, Omni Practice Group
In preparation for listing your practice, there are several steps to consider, but one important step that is often overlooked is settling any outstanding liens against your practice. As you know, “A lien is a claim or legal right against assets that are typically used as collateral to satisfy a debt. A creditor or a legal judgment could establish a lien. A lien serves to guarantee an underlying obligation, such as the repayment of a loan.”
All liens tied to your dental practice must be settled prior to, or at closing. In some cases, the seller can use the proceeds of the sale to pay off outstanding debts such as equipment loans or business loans, which would be settled during the escrow process.
Sellers are often unaware of liens still showing as active. By performing a UCC (Uniform Commercial Code) search liens can be identified. These debts may have already been settled, but the lien holder either failed to file the lien release or filed it incorrectly. For these reasons, I highly recommend performing your own UCC search prior to listing your practice for sale. A “UCC search is a process through which business owners contact the secretary of state for the state in which their business is located and request all the UCC information (related to your practice). In some states, you won’t have to contact your secretary of state’s office at all – instead, you can use an online database for UCC lookup.” For Washington State, visit the Department of Licensing website https://fortress.wa.gov/dol/ucc/ to conduct your own search.
If you find any active liens that have already been settled, simply contact the debtor directly and request that they file a UCC-3 Termination Statement, which is essentially proof of debt termination. And don’t forget to ask for a copy of the UCC-3 so you have documentation to provide to your escrow officer. This is a simple task but can slow down the closing process if not addressed in advance.
Read MoreWhat Dentists Need to Know Before Selling to a DSO
By Selling your practice is a major decision you face. You must decide when is the right time to sell? At what price will you sell? To whom do you want to sell your practice? And how will you transition out? These last couple of years haven’t helped any with Covid not going away anytime soon, the economy during a recession, and potential tax increases at the state and federal levels. To add to all of that, now corporate buyers, called Dental Service Organizations, or DSOs, are becoming more and more prominent. I would like to talk about DSOs and make sure you know who they are, what their goals are, and what you may be getting yourselves into.
There are many shapes and sizes of DSOs. Some start out as a small group, owned by a dentist or a group of dentists and backed by a local or national bank. These small groups grow and eventually outgrow their bank, then look to other forms of financing to grow into a DSO. That’s when they reach out to private equity groups that have billions of dollars of cash from investors to provide to the DSOs. The private equity groups invest in the DSOs in exchange for ownership. That can come in many forms, but they usually take the majority ownership in the group. I won’t get into how they structure the ownership too much since private equity groups are not dentists and some states require someone to be a dentist to own a practice, but just know that they typically have a dentist own a piece of the DSO in order to tread in the grey area of legally owning a practice. Some attorneys will argue that this isn’t even legal, but they get away with it.
The DSOs look for practices that are well run with annual collections above $1 million. Some DSOs will buy practices that are doing less and merge them into a practice nearby. Or they buy a practice because it is in a great location, and it will help fill their footprint. They also like to buy a practice that has six to eight operatories. They love it if it has more than eight ops. They also do not want to go in and update the practice. They will do it but expect to receive a lower price.
One of the major requirements of the DSOs is that the selling doctor and any longtime associates stay after the sale is complete and work back in the practice. Most want the seller to stay a minimum of three years. That can be negotiable for a shorter or longer period. You might find a small group or associate who will let you leave shortly after the sale, but those are few and far between. For the most part, if you do not want to stay on and work, they do not want your practice. The employment salary is typically market. Some will pay more; some will pay less. Several DSOs have benefits that the seller will be able to participate in as well. If you have a great benefits package that you are currently providing your staff, there is a pretty good chance that will be reduced to the benefits package the DSOs offer their other practices.
When DSOs look at a practice, expect to run a lot of reports, both from the practice management system and from your accountant. They also will want to know what you’re paying your staff, benefits, sick time, holiday pay and any other compensation or days off you may provide them. Again, if you give your staff a few extra personal holidays, extra bonuses, or any other perks, you can expect those to be eliminated. If you have special payments or provide free dental work or discounts, there’s a chance those will be cut as well.
When DSOs write up an offer, they need to be read very carefully. Even though these are non-binding, the DSOs will refer to them during the entire process. Once the offer, called a Letter of Intent or LOI, is signed off on by both parties, it will be handed over to the attorneys to draft up an agreement. After it’s handed over to the attorneys, the purchase and sale agreement will be written according to the LOI.
The DSOs make their offers challenging to understand. Some will give you a purchase price that includes accounts receivable in the price. You might read the offer and say, “Wow, they’re offering me 100% of last year’s collections.” No, they’re not. They’re offering you 70% of last year’s collections and they will pay the market rate for the accounts receivable. The offer will pay you a percentage of the purchase price upfront. It’s typically around 70% of the purchase price at closing. They will have you carry a note or finance the last 30% and pay you a market interest rate. You may receive a lump sum payment each year while you work back. If you have a three-year work back employment agreement, you may get one-third of the 30% paid the first year, one-third the second year, and one-third the third year. However! You are typically required to keep the production level or net income of your practice up to a certain level. If you do not, you will either get a pro-rated amount, or you may not get paid that portion at all! Go back and read that again, as it is important. If you are counting on that last 30%, there is a bit of a gamble. What happens if they change the culture and the entire staff, and many patients leave? What happens if you have health problems? What happens if there’s a pandemic (we know that happens)? What happens during a recession? There are so many things that can happen in those three years.
Another thing to watch out for is how do they make the calculation for net income. Most will charge the practice a 5% – 15% management fee. They require you to make a net income number, but now they added a management fee on top. I’ve seen this in place where they added staff to the practice as well as an associate. The doctor didn’t make his net income number to no fault of his own.
I have heard stories of DSOs offering practices above-market prices. We have been involved in several DSO sales lately and we have not seen a DSO pay above market for a practice. They have typically paid the market price. If your friend tells you they received 120% of collections, ask them to prove it. DSOs will quote prices on occasion based on EBITDA. That’s “Earnings Before Interest, Tax, Depreciation, and Amortization”. It’s a term used in the investment world for private equity as well as Wall Street. There are different ways to calculate EBITDA that private equity groups can manipulate, so don’t get caught up in quoting prices based on a fancy word. I’ve heard doctors say they sold their practice for 5 or 6 times EBITDA only to find out they input that management fee and the note payment into the EBITDA calculation. It truly wasn’t anywhere 6 times EBITDA.
There are good DSOs and not-so-good DSOs out there. Some will completely change the culture of your practice. They will scare staff away with benefit and salary changes. Some will keep everything the same to the best of their abilities. But the staff knows you will eventually leave, so they may more readily look at other opportunities.
The best advice I can give you is that if you are looking at an offer from a DSO, be sure and have an expert review the offer. Many of the local attorneys and brokers have worked with the DSOs. They know who are good and who may be a bit challenging. They also know the inside secrets the DSOs have where they may try to sneak something by you. I’ve seen doctors sell to DSOs and quite a few months later leaving the final 30% on the table. They just couldn’t take working for someone else in a different manner than they were used to. Know what you’re getting yourself into before you take that leap.
Read MoreWhat Do You Think Your Practice is Worth?
Megan Urban, Practice Transition Advisor at Omni Practice Group, explains why it is a good idea to get an understanding of what your practice is worth 2-3 years before you plan to sell.
Read MoreIt’s All in the Numbers
As you close out this past year and reflect on the first full year without any shutdowns as 2020 brought us, it makes sense to step back and take a look at your numbers. This is the case whether you are in your first year of practice ownership, have owned your practice for ten years, or you are getting closer and closer to retirement. You should always be managing your practice to your numbers while keeping the number one goal of taking care of your patients to the best of your ability.
So that all sounds great, but how do you manage to your numbers? The first step is grabbing your Profit and Loss statement and a Production by Provider or Production by Procedure report for 2020. If you know Microsoft Excel, you can input the numbers into an Excel spreadsheet. If you don’t know Excel, you can grab your handy-dandy calculator.
Most numbers you manage to are calculated based on a percentage of your gross collections. That’s the top number on your profit and loss statement. You should take the number after returns or other credits to gross revenue. Some Profit and Loss statements may call this number Profit and others will call it Revenue.
The first number to look at is your staff expense as a percentage of revenue. Add your staff salaries, payroll tax for staff, and staff benefits. Divide that total by revenue. Your target should be about 25% of revenue. If you’re slightly above 25%, don’t worry, increasing collections while keeping staff salaries flat will help you improve this number. If you’re over 35% and you really don’t think you can improve collections, you should analyze your staff. Maybe you have too many, or maybe your staff that is overpaid. These days, it’s easy to overpay staff since they’re hard to come by. Time and time again, when we look at practice numbers, this is one of the biggest profitability killers.
The next number to look at is facilities expense as a percentage of collections. This includes your base rent plus any of the common areas that you pay for and other facilities expense – garbage, parking lot maintenance, etc. This expense should not be more than 7% to 9% of revenue. If you are significantly higher than this number, you are not maximizing your facility, overpaying on rent, or you have too big of space for what you need. You can either increase collections or decide to downsize your space, sublease space, or do something else that will help get your numbers down in the 7% to 9% range.
Dental Supplies expense is something else to look at. Divide Dental Supplies expense by revenue. The target is 6% of revenue. If you’re a few percentage points off, don’t worry about it. If you’re at 12% to 15% or higher, you may have supplies walking out the door, overstocking your supply cabinet, or you’re buying top-end products. This should be a quick fix if you have a meeting with your person that orders supplies and give them a budget.
Lab expense is similar to dental supplies. If you’re a basic crown and bridge practice, you should be at 7% to 9% of revenues if you don’t use a milling machine in-house or you don’t place a lot of implants. The latter two will skew the numbers. Negotiate with your lab if you are higher than 7% to 9%. If you’re with a high-end lab, you’re at 12% and love their work, don’t change labs. You’re only a few points off. You can make up the difference elsewhere.
The other quick measure is hygiene as a percentage of total collections. Take your Production by Provider report or Production by Procedure report and figure out how much of collections are coming out of hygiene as a percentage of total revenue. The target is to be above 30% of revenue coming from your hygiene program. If you’re in the low 20% or less and you have a general dental practice, you should take a look at your hygiene schedule and see how many patients they’re seeing per day. Maybe their schedule isn’t full, or maybe hygiene is booked out for several months and the hygienist can’t keep up. You will need to analyze this for yourself.
Looking at your numbers is something all business owners do to help them manage their practice. These are a few simple numbers that you can quickly measure a few times per year, make a few changes and you can get your overhead down below the national average of 65%. Best wishes on the New Year and may your overhead be under control.
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