6 Things NOT to do when Preparing to Sell your Practice

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I am often asked by dentists considering retirement what they should do to prepare to put their practice up for sale. These dentists are eager to do what they can to increase their chances of a timely and profitable sale when they are ready. Unfortunately, there are a lot of misguided decisions that tend to be made during the last years of practice that will likely not payoff when the time comes to sell. Here are 6 things NOT to do when preparing to sell your practice.

Give the staff a raise

Maybe you haven’t given your staff a raise in longer than you’d like to admit. Maybe you feel bad about this and think you can make it up to them by giving them a raise before you sell. You might have to bear the cost of this decision in the short term, but it will be the buyer that bears it in the long run, not you. Although this may feel like the right thing to do by your staff, one of the biggest expense of a dental practice is the staff salaries and increasing their pay above 28% of revenue could cost you more than just their raises. Buyers really focus on cashflow when deciding whether to purchase a specific practice or not. If the supply expense is too high, a buyer can rationalize it by saying they can shop smarter. If the lab expense is too high, they can look to switch labs. If the staff expense is too high, they cannot walk in the door and cut salaries or fire people. This is much too risky when going through a transition. Plus, it would undo the good deed you feel you did by giving everyone raises in the first place. When it comes to your staff and setting your practice up for a successful sale, see what you can do to make sure this expense is in line, 28% of revenue, so that you don’t lose a potential buyer over it.

Let your lease expire

Many dentists target their retirement date around the same time as their lease will expire. Although they don’t plan on closing their doors and walking away, they think that timing their exit this way is the smart thing to do. However, most buyers will need the right to stay in the facility for at least 10 years after they purchase the practice if they want to get bank financing to buy it. If you let your lease expire, you run the risk of not being able to get a lease long enough to satisfy the lenders, therefore limiting your buyer pool to cash buyers or practice owners nearby who are interested in a merger into their space. Do yourself a favor, look over your lease. If it is expiring soon and you don’t have a renewal in place, consider hiring a real estate professional to help you obtain a fair lease that can be assigned to a buyer when you are ready to transition. Negotiate like you plan on staying there for the entire length of the lease; don’t agree to terms that you wouldn’t normally accept just because you know you won’t be there the entire time. Just like with staff, the rent is a large expense and if you have a bad lease in place it can affect a dentist’s decision to purchase your practice.

Purchase new equipment

For most practice owners, you do not need to purchase new equipment before you sell your practice. You do, however, need to make sure your existing equipment is in good working order. Since the value of your practice is based more on cashflow than tangible assets, you will probably not recoup your investment if you pour tens of thousands or more dollars into new equipment right before you sell. The only exception to this is upgrading to digital x-ray. If you are still developing film, you should strongly consider making the switch to digital before trying to sell your practice. Most buyers have never worked with film and will consider upgrading to digital a necessary expense if they purchase your practice. This will make them inclined to negotiate the price of the practice to cover this cost. If the buyer wants to make any further improvements to the equipment, it will hopefully be improvements that will also increase the revenue of the practice which in turn should increase the value of the practice and their equity in it.

Let your staff in on your plans

When I am asked when the right time to tell the staff that they are selling is, I always disappoint with my answer. There is no perfect way to do this. My advice is always to wait until you’ve cashed the buyers check to tell the staff. Many people feel uncomfortable with this because they feel like they are lying to people who have dedicated years of their life to the practice and them. But, knowing it could take a few years to sell your practice, it is much more unfair to the staff to make them live in uncertainty for a couple of years while you work to find a buyer. Imagine the stress that would put them through! Even when you have located a buyer and things are moving along nicely, until money changes hands, the buyer can back out. We recommend that you wait until the transition has been consummated, then you call a staff meeting letting them know that you have sold the practice and then immediately introduce them to their new boss. That way they won’t go home and have nightmares about this new monster that is taking over. Some might be angry that you didn’t tell them sooner, but if you are of retirement age, they probably won’t be surprised.

Reduce your hours

Unless you don’t need the full value of your practice in order to retire, you need to maintain your revenue until you sell. The biggest red flag for a purchaser is declining revenue, even if it can be explained by reduced hours and days. By slowing down while you are still the owner, you are changing the momentum of your practice and reducing its value. If you still love practicing dentistry, but want to work less, you have options outside of running your practice into the ground. You can hire an associate to pick up the slack, you can sell with the right to stay on afterwards, or sell and work somewhere else. If you choose to reduce your hours before selling, do so with your eyes wide open and don’t be surprised when you have to take dramatically less for your practice, if it can be sold at all.

Ramp up production

I am sure I am going to catch some flack for this one, but for most older dentists, this is not the right thing do to because it is a gamble that probably won’t pay off. If you have been coasting for the past ten years and all of a sudden try to ramp up your practice because you want to retire in 3 years, beware. First of all, if increasing your revenue was as simple as a change in mindset, everyone would be doing it. Increasing your revenue is hard work. Even if you put thousands of dollars into marketing, consultants, and new equipment there is no guarantee that you will increase the revenue enough to move the needle on the value of your practice. And if your expenses increase during those years or ramping up, your net will decrease. This means you will be making less money and your cash flow will drop which could put downward pressure on the value of your practice. You can find yourself three years down the road, exhausted, with less money in the bank and a lower valued practice unless you really know what you are doing. I am not saying that it won’t work, I am just saying that most dentists who see retirement in the horizon are in the wrong frame of mind to make this ramp up successfully pay off. Be realistic about the time and energy you have to devote to this at the twilight of your career. You might realize that quality of life during these years is just as important as a few extra dollars.

Final Thoughts

Every practice and every practitioner is different. Your exit plan should be customized to you and your situation. If you aren’t sure which way to go, give us a call for a free consultation. We’d love the opportunity to work with you!

The DSO Effect on Practice Transitions

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I received a call from a former client the other day asking me if we had any non-corporate dentists buying practices anymore. This was a client who had purchased her practice only 2 years ago and already thought that the transition landscape had changed so much that Dental Service Organizations (DSO) were now the only buyers for dental practices. I have been making it a point to talk about DSOs each time I present to a group, but until I got that phone call, I didn’t realize how big and widespread the misconceptions were and how important it has become to inform the dental community about their options.

The latest report from the Health Policy Institute regarding DSO trends, “How Big are Dental Service Organizations?”, shows that in 2016 the nationwide average of US dentists working for a DSO was 8.3%. That was up from 7.4% in 2015. It is no surprise that this number is moving higher, but I believe that is still much that can be done to curb it.

As a practice broker, I can use my influence to sell more or less practices to DSOs. Would it be easier to keep a stable of 10 DSOs to sell all of my practices to instead of maintaining a pipeline of hundreds of new and eager buyers? Probably. But, I am a strong proponent of private practice and the higher quality of patient care that they provide. Our nation is already struggling with a decline of small businesses; do I really want to be a contributor to that trend as well?

I have learned a lot from talking to dentists around the country. The information that is out there on DSOs as they relate to practice transitions varies widely and is much exaggerated. They have a huge marketing reach and are pounding their target audience with messages that are misleading and half-truths. No longer do you “sell” to a DSO; now you “affiliate” with them. No longer do you ”work” for a DSO; you “partner” with them. They realize that they have somewhat of a bad reputation and they are using the power of words to try to change that.

If you are a young dentist coming out of school, you are probably overwhelmed by the volume of DSOs courting you to come work for them. DSOs can offer a higher compensation than most private practices and typically provide benefits such as health insurance and retirement plans. I don’t find this to be too much of a bad thing, but it is sad to see private practice owners struggle to retain good talent because they can’t operate on the same margins as a DSO. However, most young dentists only spend a few years in the corporate world before they decide that they have had enough. Most of our buyers have paid their dues in this arena and have learned a lot about what they do and do not want to do in their future practice.

If you are already a practice owner, you have probably received hundreds of postcards and letters from various DSOs about receiving the maximum value for your practice and the freedom to enjoy a work-life balance if you sell to them. It has been my experience that very few sellers actually get what those marketing pieces promise. The DSOs are only willing to pay top dollar for a very specific practice. Most practices don’t fit that criteria. If they don’t, the DSO will probably still make an offer, but it won’t be as much as their advertisements suggest they usually pay for practices. Since most dentists have never sold a practice, they don’t have the knowledgebase to realize that the offer from the DSO is not the best offer that they can get.

People forget that there is more to an offer besides just the purchase price. Is the DSO paying the entire purchase price to you at closing? Will it be a mix of cash and stock in the company? Will you be required to owner finance a portion that only gets paid out if you meet certain production goals? How long do you have to work after the transition? What are the penalties if you leave early? How much will you be paid? Are the accounts receivable part of the purchase price or do you get to keep them? The answers to these questions are instrumental in determining the overall value of the package being offered to you.

If you are willing to explore the option to sell to an individual dentist, you will find them better tailored to your situation. When we work with a seller, the first step is to come up with a transition plan that meets the needs of the seller and then we go looking for the right buyer for that seller. When you work with corporate buyers, you are forced into their requirements. When you work with someone like me, you are the mold and we find the buyer that fits into it.

Individual buyers can be flexible with the seller’s post-sale plans. Do you want to walk away? Do you want to transition over 3 months? Do you want to work part time for two years? They can pay up to 90% of revenue for the right opportunity. With a less than 1% default rate, banks love lending money to them! And wouldn’t it be more gratifying to hand your patients over to a younger dentist ready to make your practice his home for the next 30 years?

Interested in a blend of a DSO and an individual buyer? There are many dentists entering the small group practice space. These are dentists that are interested in owning more than one practice, but don’t typically grow beyond 10. They are better suited than the first-time buyer for the higher grossing practices, as they have the skill set needed to operate such a practice and can typically offer a higher price because the banks will look at their overall revenue when determining how much to lend. Also, these small group practices typically offer a competitive compensation for the dentist that stays on to work and won’t have any post-sale production requirements.

The sky is not falling. You do not have to become a DSO, sell to a DSO, or work for a DSO. The Corporate space is growing, and growing faster than we’d like, but that doesn’t make it your only choice. If you are considering buying or selling a practice, it pays to look at all of your options.

5 types of buyers in the market for a dental practice

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Curious to know who are buying dental practices right now? Want to know who could potentially buy yours if you were to sell? Here are five types of buyers currently in the market for dental practices.

1. New Buyer

This is the most common buyer. Most first time practice buyers are 5-10 years out of dental school, have been working as an associate in a large practice, and have decided it is time for them to be their own boss. Wanting control over how to treat patients and how to manage the office are the main reasons the new buyer enters the market for their very own practice. Buying a practice for them is like fulfilling a lifelong dream, so finding the right practice is very important to them. They understand that when acquiring a practice, they are acquiring someone else’s family of staff and patients and tend to treat it accordingly.

2. Partnership Buyer

Someone that wants to buy into a practice, instead of buying the whole practice, tends to be a buyer that enjoys collaborating and working as a team. This buyer also likes the idea of another provider in the office to cover for them if they want to take time off. A partnership is like a marriage and it can be very difficult to match up two people that will happily work together for the foreseeable future. Keep in mind, also, that a practice needs to have enough patients to support both providers for this scenario to work out. If the patient base is too small, the new partner will struggle to make a living and pay off the loan that enabled him to buy into the practice in the first place.

3. Merger Buyer

A merger buyer is someone that would like to add more patients to their practice through buying a nearby office and putting the two together. This can happen through the seller’s practice moving into the buyer’s location or vice versa. If the seller is moving to the buyer’s practice, the seller would need to stay on for a year or two to transition the patients to the new location. This is a very smart business decision for the buyer, as the fixed expenses of their practice don’t change but the new revenue can dramatically increase the bottom line.

4. Satellite Buyer

It is common for dentists who enjoy the business side of dentistry to want to own multiple offices. When a dentist is looking to purchase an additional practice, they look for opportunities where the seller is willing to stay on after the sale. This is important because the buyer is probably already working full time in another location or is busy enough managing the business side of the operation. This is a great opportunity for the buyer to grow their portfolio of practices and the seller to fund his pension plan while continuing to practice dentistry on his patients with much less stress.

5. Corporate/DMSO Buyer

The corporate/DMSO buyers are snatching up practices as quickly as possible. Although they are not all the same, what they look for in a practice is very similar. They want a practice with revenues over $800K with the seller willing to work for at least two years after the sale. They also typically want the seller to hold a note for 20% of the purchase price, to be paid out over the two years of post-sale employment. They do this because it is imperative that the seller continue to keep the practice producing until they can at least find a comparable associate. However, they would prefer to have the seller stay on indefinitely.

Every buyer is unique, even within each category. They all have different dreams, desires, and needs. Not all sellers have a strong preference to who buys their practice, but when selling goodwill, most dentists want to make sure their patients are going into good hands. When thinking about your transition plan, put some time into “who” you want to transition your practice to, and not just the price you want to sell it for.

Here are 5 things buyers are looking for right now

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Thinking about putting your practice up for sale? Here are five things buyers are looking for in a practice.

  1. Space Most new buyers are used to working in large dental practices with multiple providers. Typically, these practices are high volume and require the associate dentists to work out of up to three rooms at a time. When these dentists are ready to purchase their own practice, they can’t imagine how a dental practice can operate out of any less than four treatment rooms. If your practice has only three chairs, but room to add a fourth, you might consider doing that before putting your practice on the market. If your practice doesn’t have room to add a fourth, it will have a negative impact on the value of your practice and limit the number or purchasers willing to entertain it. However, a physically small practice could also be a good candidate for a merger into another, larger office nearby, depending on the lease.
  2. Visibility Long gone are the days when dentists want to be tucked away in professional buildings with no road signage. Buyers are very concerned about new patients and most feel as though it is imperative to have good visibility. If potential patients are driving by your office and have no idea you are even in there, buyers will have some concerns to work through. However, don’t run out and build out a new space down the street to gain more visibility. Just understand that it might take a little longer to find the right buyer for your practice.
  3. Procedures As most dentists near retirement, they begin referring more procedures out. This is a good thing to buyers! They want to make sure that, not only can they do the procedures done by the selling dentist, but that there are a few that they can add to the practice. Adding procedures to the practice allows the buyer to increase revenue without having to add a single new patient to the practice. This is the kind of potential buyers can easily understand.
  4. Cash flow What the practice owner takes home after paying all of the practice related expenses is considered the cash flow. Although revenue is important, buyers are more concerned about what they will put in their pocket if they buy your practice. It is good to understand if your overhead is in line with industry standards or if you need to make some adjustments. Not sure what those benchmarks are? Ask a transition expert or your CPA. Keep in mind though, most buyers will use your last tax return to determine cash flow, so this could take some time to really change. Banks will also look at the cash flow to determine how much they will lend someone to purchase your practice. Not having enough cash flow could potentially leave you having to carry a note or walking away from a good buyer.
  5. Lease If you are leasing your space, it is a good idea to have it reviewed by a real estate specialist to make sure it is fairly priced and the terms are reasonable. Most buyers are concerned about paying too much in rent and a bad lease could cause you to lose many qualified buyers. On the other hand, if your lease is coming up, it might be a good time to consider a merger. Mergers are a great way for established dentists to increase their patient base, and a great way for a seller to be able to stay on and work after the sale. If you choose to renew your lease, you might consider hiring a lease negotiator to handle it for you. You would be surprised how much more favorable the terms can be when a real estate professional is working on your behalf. Best of all, most of them don’t charge the tenant a dime!

This article was published in the September 2016 issue of the GDA Action.