Selling Your Dental Practice
If you’re here, you are probably thinking about selling your dental practice. You probably have a lot of questions about how the process works. Perhaps you’ve received advice from friends, colleagues, accountants, consultants, supply reps or bankers. Perhaps you’ve read a self-published book or attended a webinar. You might even be laying awake at night with your mind full of questions, concerns and what-if scenarios. The questions below represent the questions that we often receive regarding dental practice valuations, sales, mergers and transitions. Keep in mind that every practice sale is unique and the approach to selling a dental practice must be tailored to fit the circumstances and desires of the seller while keeping in mind the realities of the market. The only way to do that is to contact us and arrange a confidential consultation. This will allow us to learn more about you and your practice and help you find the right practice transition solution for you. We sincerely hope you find the information here helpful, but if there are topics that we haven’t covered or if you want to obtain answers that are more specific to your situation, please contact us. We are here to help!
When it comes to selling your dental practice, experience and details matter.
Is this a good time to sell my dental practice?
There are many factors that go into determining when to sell your dental practice. In recent years, (COVID excepted) the market for dental practice sales has developed into a robust seller’s market in many regions. No one knows how long these market conditions will last or how they will change in the future. However, market conditions are not the only thing to consider when determining when to start the process of selling your dental practice. There are other situational factors to consider. Perhaps there is a strategic buyer that is looking to purchase a dental practice specifically in your area. Have you spoken with your retirement advisors to determine if you are financially ready to retire? Are there health or other life events that are accelerating the timeline for when you need to sell your dental practice? Are you physically able to continue to practice at a pace that will keep the practice economically viable and salable? What is your motivation to sell? Are you mentally/emotionally ready to sell your dental practice? Many people, especially professionals, often define themselves by their vocation and for many dentists, their dental practice represents their life’s work and their passion. So in many ways, selling your practice feels like losing a piece of your identity. It is important to think about these “soft” elements of selling your dental practice. The good news is that working with a good dental practice transition consultant or practice broker can help you work through these things and help you determine if it is the right time to sell your dental practice. To get the best result, we recommend contacting us several years in advance as this will allow us to develop a sound exit plan together that incorporates the above elements.
What is my dental practice worth?
This is usually the very first question that sellers ask when they begin to consider the sale of their dental practice. There are numerous factors that drive Fair Market Value of a dental practice. These include the type of practice (e.g. group, solo, general, specialty, etc.) location of the practice, age and type of the equipment, ambiance of the office, the number of operatories, size of the office space, the lease, the seller’s sale/transition plan, the production mix, new patient flow, collections/revenue cycle, staff, practice management, proposed deal structure and many more. However, the most important driver of value in a dental practice is cash flow, without question. That is because that is what a purchaser is buying when they decide to purchase an existing practice rather than starting one from scratch. Further, cash flow is what banks consider when making loans for dental practice acquisitions. If the cash flow in your dental practice isn’t enough to service the debt that a purchaser would take on to acquire your practice and leave them with a comfortable living, then your practice will not have much value and will be difficult to sell. In some cases, if a practice is small and the cash flow is tight, a strategic buyer, a merger or a chart sale may be the only viable path for selling your practice.
Additionally, we have all heard a number of “rules of thumb” or anecdotal practice values thrown around by dentists, accountants, bankers, and even dental practice brokers. Use extreme caution! Valuing a dental practice correctly isn’t a one size fits all exercise where we slap an 80% or 90% of collections asking price on the practice and see what happens. Sadly, we see this inappropriate and unskilled approach to dental practice valuation used often and it only leads to frustration for all parties involved. Fair Market Value of a dental practice is defined as: the price at which a practice would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length, in an open and unrestricted market, with both having reasonable knowledge of the facts of the practice and neither being under any compulsion to buy or sell. In other words, your dental practice is worth what a buyer is willing to pay for it. It doesn’t matter what you believe your practice is worth or what rule of thumb you heard from your friend, family member, accountant or banker. It all boils down to what the market will bear for your practice. A skilled practice transition professional’s job is to accurately estimate what the market will bear for your dental practice and advise you honestly. The good news is that if you contact us before you’re ready to sell (2-3 years), we can help you determine the current value and salability of your practice and make recommendations to help you improve both.
What can I do to prepare my practice for sale?
There are a number of things you can do to help prepare your dental practice for sale:
1) Pre-Sale Planning – Work with your dental practice broker or practice transition consultant to establish the value of your practice, evaluate the transition/sale options that are right for you and your practice, review the lease, etc. If you have time (12 months or more) we can also work with you to examine your business practices, benchmark the financial performance of your dental practice and make suggestions to cut costs, and possibly raise fees to improve cash flow and increase the salability of your practice.
2) Clean up office records and financials – Work with your accountant/bookkeeper to ensure your financials are well organized and accurate. Work with your office manager to make sure months are closed out correctly in your practice management software, purge inactive charts, write off old accounts receivables, deal with credit balances on the books, etc. Ask your dental practice broker for help with this.
3) Deal with any issues in the practice – Assess your practice and make sure there are no hidden issues that could cause problems down the road. Potential legal issues, environmental issues, problems with a lease, staff problems, etc. are all potential red flags for dental practice buyers. It is best to disclose these issues to your dental practice broker up front and get them resolved well before you start the sale process!
4) Financial/Tax Planning – Consult with your CPA or tax advisor to ensure you are financially ready for retirement and that you fully understand the tax consequences of a practice sale. We are also happy to assist your CPA in understanding the likely sale price and work with them to determine a likely tax allocation for planning purposes.
5) Spruce up the office – Repair or replace broken equipment, replace worn out flooring, paint and refresh the décor of the office and give the office some curb appeal. Update the technology in your practice. Remove equipment that is broken or is unused. The office should look clean, organized and decluttered. How an office looks and feels matters!
6) Keep your dental practice running at its best throughout the sale process – We often find that once a dentist has made the mental shift toward selling their practice, they have a tendency to slow down. It is imperative that you do not take your foot off the gas before or during your practice sale! You want to keep office hours normal and maintain or increase your pace of production. Additionally, make sure you keep your dental supplies at a usual and customary level.
I already have someone interested in my practice. Why do I need a broker to sell my practice?
You can certainly sell your practice on your own, but I don’t recommend it. In our experience, a dentist that attempts to sell their practice on their own has roughly a 50/50 shot that their deal will fall through and they will have to start back at square one. Selling a dental practice and doing it right is extremely time consuming and there are many potential pitfalls throughout the process that can derail a deal, even when a buyer and seller have the best of intentions.
It is difficult to quantify the things that a good practice broker does to make a deal predictable and smooth and what value that brings to a dental practice sale. Our clients frequently tell us after their deal is done, that they had no idea how much work went into getting a dental practice sold and that there was no way they could have done it on their own. One recent client remarked, “There is no way I could have done it without you. You definitely earned every penny of your fee…and then some!” Bringing together a successful practice sale and transition is a nuanced art that goes far beyond just determining a price and finding a buyer. As with most things in life, it isn’t necessarily what you do, but how you do it that makes all the difference.
Unfortunately, there is a persistent belief among dentists and others in the dental industry that finding a buyer is the main value that a dental practice broker brings to a sale. Finding “interested” buyers is the easy part. Beware of those in the dental industry that like to play matchmaker, but don’t like to get involved in the more challenging aspects of getting a deal done successfully. The fact is that 80% or more of the work in selling a dental practice starts once you have a signed and accepted offer for your dental practice.
From marketing the practice, to negotiating the deal and writing offers, to managing the buyer’s due diligence process, to responding in detail to numerous questions from the buyer, lenders, accountants and consultants, to getting the deal financed, to coordinating with attorneys to finalize contracts, to constructively solving any issues that arise (every deal has a twist) and shepherding the deal all the way through to closing, the work that a good dental practice broker does is invaluable. A good practice broker can make all the difference between a smooth and predictable dental practice sale and a disaster. When we are talking about an asset as significant as your dental practice, which in many cases represents your life’s work, why wouldn’t you engage an experienced and competent dental practice broker to tilt the odds of a successful practice transition in your favor? When it comes to selling your dental practice, experience and details matter. Don’t go it alone!
What are the tax implications of selling my practice?
The sale price of your practice will be different than what you actually put into your bank account when the dental practice sale transaction is closed. There will be federal (and in some cases state) taxes that will determine how much of the sale proceeds you get to keep. The type of legal entity that you formed for your practice (LLC, S-Corp, C-Corp, etc.) will influence how your practice sale proceeds are taxed. Additionally, if you have provided seller financing as part of the sale, this also has tax implications. One important factor that determines the taxes you will pay is the allocation of the purchase price of the practice assets. How much is allocated to goodwill, tangible assets, etc. will impact the taxes you will pay on the proceeds of your dental practice sale.
While we work cooperatively and collaboratively with your tax advisors to develop a favorable tax allocation, it is critical to understand that the allocation of the purchase price for tax purposes is often a negotiating point between the buyer and seller. As such, it is important to talk to your tax advisor early in the process to fully understand the tax implications of a sale in order to be prepared and avoid any unpleasant surprises.
How long will it take to sell my dental practice?
The short and honest answer is, nobody really knows. Each local market and practice is unique. A skilled broker should be able to give you a reasonable estimate of how long it will take to sell your dental practice with some basic information. Urban practices in high demand areas tend to sell faster than dental practices in rural areas. For instance, it can take 2+ years in some rural areas to find a buyer for a practice, whereas a good practice in a high demand urban area can get several offers in a matter of hours or days. On average it takes 3-9 months to sell a dental practice but you need to adjust for the buyer demand for a particular area and the salability of the practice. Also keep in mind, once the buyer and seller are to terms, it will usually take around 2 months to get the deal closed comfortably.
Will I be expected to work in the practice after closing? Wouldn’t the buyer want me to stay to improve patient and staff retention? Wouldn’t the buyer want me to mentor them after the sale?
It all depends. If you are selling to a DSO or a dental group, they almost always want the seller to stay on and work in the practice after the sale. Often these kinds of buyers want the seller to work part-time or full-time for up to 2-3 years. This can vary depending on the size and type of dental practice, availability of associates in the area, etc.
In a case where you are selling to a solo doctor, if the practice isn’t large enough to support two doctors, then a buyer is probably not going to be able to keep you working in the practice after the sale. Also, it is important to keep in mind the motivation of a buyer. When they decide to purchase a dental practice, it is usually driven by their desire to call their own shots and make more money. This often means they are less eager to being mentored than most sellers are to provide mentoring. And, while it seems intuitive that having the seller work in the practice after the sale would help staff and patient retention, that may not always be the case. Typically patients will give the buyer a try based on the recommendation of the seller. If the seller is still available, patients will often insist on seeing them. This can make it difficult for the buyer to meet and build trust with the patients in the practice that they just spent a lot of money to purchase!
Further, having the seller stay on can create divided loyalties among staff which can be very disruptive. It can also make sellers very uncomfortable to see buyers making changes to the practice. Understandably, sellers are protective of the practice that they spent years of their life building in a very specific way, but you must remember that once you no longer own the practice, the buyer has the right to run the business however way they want.
There are certainly ways to mitigate these issues, but the outcome will often boil down to the kinds of personalities involved. It is important to “know thyself” and take time for self examination before entering into an agreement to work in the practice after the sale.
When should I tell my staff that I am going to sell my practice?
Generally, we don’t recommend telling the staff (or patients) that you are selling your dental practice until we are certain that the transaction is going to close. There are a number of thresholds and conditions we use to help us determine if/when a deal is solid and is likely to go through. In many cases, we don’t have all of those fall into place until we are 1-3 weeks away from closing.
In our experience, staff members do not cope well with uncertainty. It can be emotionally very difficult for employees of the practice to sit with the knowledge that you are going to sell the practice when they don’t know who will buy it or when it will happen. Their anxiety gets the better of them and in many cases they will try to find a job at another practice just to avoid the uncertainty. This certainly isn’t good for sellers or buyers! We’ve even seen some employees take jobs for less pay with a longer commute just because they were terrified that they wouldn’t like the buyer that we had not even found yet! Worse yet, we have seen some staff members try to intentionally sabotage deals so that the seller couldn’t sell their practice.
With that said you know your staff better than any dental practice broker and there are some cases in which it makes sense to pull some or all of the employees into the loop regarding your dental practice sale. We will work with you to develop a plan for when and how to tell the staff about the sale and introduce them to the new buyer so we can minimize stress for the staff and keep the office stable.
Do you represent both the buyer and seller in a dental practice sale?
No. We will only represent one party in any given transaction. We philosophically disagree with the idea that a broker can represent two parties equally and adequately and feel that dual representation is ripe for conflicts of interest. We take our fiduciary responsibility to our clients seriously and work hard to represent their interests in the deals we do. With that said, we have a duty to deal with everyone fairly and honestly. We work to create deals that are built on good faith and trust. We avoid creating an adversarial environment through thoughtful and constructive negotiation and clear communication.