Podcast: How to Sell Your Dental Practice to Another Dentist
Dental Podcast Transcript Summary:
Understanding Dental Practice Sales
Good day to all! Let’s dive straight into today’s webinar. We appreciate the value of your time, so we aim to keep this concise, aiming for around 30 minutes. While we understand that webinars can be a bit exhausting, especially in our zoom-heavy world, we’ll provide valuable insights swiftly. If any questions arise, please feel free to drop them in the chat.
The Dental Practice Sales Dilemma
A recurring concern I hear from dentists is regarding retirement. When asked about prospective buyers, many wish to sell their practice to another dentist or a first-time owner associate. However, there’s an underlying belief that most will end up selling to a corporate entity. But this isn’t always the case.
Certainly, there are instances when selling to a corporate buyer or a Dental Support Organization (DSO) makes sense, and many DSOs do form fruitful partnerships with dentists. However, a common scenario for single-dentist practices is the desire to retire and completely step away from dentistry. Corporate transitions often require the dentist to continue working for a few more years, becoming an employee in the process. This transition doesn’t always resonate well, and there’s a lingering perception that due to mounting student debts, associates are either unable or unwilling to buy.
Introduction to Rosen Dental Transitions
I’m Dave Miller, the Managing Partner at Rosen Dental Transitions. My background in the banking sector, particularly in dental transactions with Bank of America, has provided me with insights into what potential buyers want. A majority of the transactions I’ve overseen involved first-time buyers or dentists venturing into their initial practice ownership.
It’s a misconception that young dentists, even those with significant student loan debts, are unable to secure financing. Several dental-specific lenders, such as Bank of America, TD Bank, PNC Bank, and even financial firms like Practice Pathways, cater to this demographic because dental practices rarely fail. This makes them more financially secure compared to other businesses, such as restaurants or retail stores.
Rosen Group Overview
Rosen Dental is more than just transitions. The Rosen umbrella houses:
Rosen and Associates: An accounting firm with over 800 dental practices as clients, predominantly in New England.
Rosen Summit Dental Advisors: Originally Summit Advisors led by Nancy Kagan, this consulting team offers outsource billing solutions and in-office practice management, improving practice efficiency.
Rosen Dental Transitions: My domain, which focuses on evaluating dental practices and aiding in transitions to retirement.
There’s also CCR Wealth, our wealth management counterpart.
Addressing the Corporate vs. Associate Sale Dilemma
The burning question many have is the financial implications of selling to an associate versus a DSO. It’s a prevalent belief that selling to a DSO yields a higher financial return due to tales of lucrative multiples and equity-based offers. But there’s a catch.
When you sell to a DSO, you often need to work for them, missing out on business profits and potential tax benefits. In contrast, if you simply ran your practice for a couple more years and then sold to an associate, the financial outcome might be more beneficial.
What Associates Seek in a Practice Purchase
When considering selling to an associate, it’s crucial to understand their perspective. Here are some insights:
Financial Stability: Associates don’t want their income to decline upon becoming an owner. If your practice’s earnings are not significantly higher than what an associate would earn as an employee, the allure of ownership diminishes.
Turnkey Operations: Associates often look for practices that are up and running smoothly, allowing for a seamless transition.
When considering selling your dental practice, it’s vital to weigh your options carefully, keeping in mind both financial implications and the future vision for your practice.
I’ll say this with a caveat: if you’re planning to sell in the next six months, it might not make sense to spend $150,000 on new equipment. However, if your practice still uses outdated methods like film plates instead of digital X-rays, potential buyers will consider this a mandatory upgrade. Buyers, especially younger ones, have been trained in dental school to rely on digital methods. So, they might see this as an immediate investment they have to make upon purchasing.
Furthermore, the size of your practice can influence a sale. While smaller practices can still attract buyers, many associates are looking to grow a practice to over a million in collections. Trying to do that with less than four operatory rooms is challenging. So, having at least four rooms, or the potential to expand to four within the existing space, is a selling point.
Location is also crucial. Rural practices may find it harder to attract buyers due to lower demand. Practices in high-demand areas can fetch higher prices, sometimes even starting bidding wars.
Another important aspect is the range of procedures offered. If you’re mainly a restorative dentist referring out more specialized tasks, a buyer might see that as a potential for growth. For instance, many modern dentists handle more in-house, from restoring implants to simple endodontics.
But above all, the cash flow to cover loan payments is paramount. For example, if someone purchases your practice for $500,000, they’ll need the practice to cover roughly $60,000 annually for loan payments, in addition to other operational expenses. Furthermore, potential should not be overvalued. A practice currently collecting $500,000 can’t be priced at $650,000 based on its past or potential performance. Buyers and banks look at the current profitability and cash flow.
In terms of presentation, the aesthetic and technological state of your practice can also impact the price. If a buyer sees that they’ll need to make immediate upgrades – like modernizing the interior or updating old servers – they might deduct those costs from their offer.
When considering a sale, the size and structure of your practice matter. The transition plan for a solo general practice will differ from a larger multi-specialist setup. Regardless of size, however, there are universal steps to prepare:
Clean Up Your Books
Ensure all finances are above board. Banks won’t acknowledge undeclared cash flows when assessing loan viability. If you’ve been running personal expenses through the practice, make sure they’re clearly documented and justifiable. This includes clear distinctions between actual office expenses and personal items. Remember, every undocumented expense might reduce your sale price.
To wrap up, ensure that your financial records are clear and represent the true profitability of your practice. The more transparent and organized your records, the smoother the sale process will be. Do you have any questions on what we’ve discussed so far? If so, please ask. Otherwise, we can continue discussing best practices for transitioning.
You know how banks operate, right? They usually peek back at our financials for the last 2-3 years. So, a little advice? Tidy up your books at least 2-3 years before thinking of selling. But hey, if there’s a little mess here and there, it’s not the end of the world.”
Before You Sell, Think About
Chatting with Family: Have you sat down with your family, especially your advisers, and talked retirement? And with your spouse – think about it, if both of you are home all day, will it be Netflix and chill or more like a daily soap opera?
Money Matters: Also, let’s be real about the money. Sometimes we think we’re getting a big payday, but then debts, taxes, and other stuff sneak up. It’s like expecting a chocolate cake and getting a muffin.
Emotions and Work: And emotionally, how do you feel? For some, work is a huge part of who they are. Leaving can feel like trying to fill a big void. Been there?
Let’s Talk Business Health
Where’s The Money Going? You ever notice how sometimes money just seems to disappear? Like those unpaid insurance claims and receivables? With all this COVID chaos, it’s easy to miss out. But that’s hard-earned money waiting to be claimed!
Patient Credits – Tricky Business: Oh, and speaking of money, those patient credits? They’re like silent little liabilities. You don’t want to sell and then realize you left a ton of money on the table, right?
Posting Whoopsies: Ever caught those posting mistakes? Like, hygienists getting doctor credits? It’s like paying for gourmet coffee and getting instant. Doesn’t add up, right?
- All About Hygiene: On the topic of growth, have you seen how much your hygiene department’s doing with periodontal work? The sweet spot is more than 20%. Just a heads-up!
- Schedule Woes: And man, these unscheduled check-ups! Pull up some reports, and you’ll see it’s an opportunity goldmine. Though I get it, with everyone juggling so much, it’s like trying to sip coffee during a roller coaster ride. It really matters how efficient a practice’s scheduling is. It can be assessed within a two-hour Zoom meeting by examining the practice management report. You’ll quickly spot the issues, and we’re here to assist if needed.
When selling real estate along with the practice, many associates lack the initial down payment. Banks want assurance that they’re not stretching their finances too thin. Some solutions include:
- Renting to the Buyer: Typically, you can rent the property to the buyer with an option for them to purchase in a few years.
- Selling to an Investor: Alternatively, sell to an investor who then leases it to the buyer.
- Financing the Down Payment: Help the buyer by financing the down payment.
For those leasing their practice’s real estate, renegotiate lease terms to match market rates, especially if they’re unfavorable. Leverage your long-term commitment to gain concessions, like property improvements.
For practices preparing to sell:
- Single Doctor Practices: Avoid letting your collections decline as you approach retirement. Understand your excess cash flow and the net proceeds after all liabilities.
- Multi-Doctor Practices: The key is understanding how replaceable you are. If you’re the primary producer, ensure associates can take over significant production before selling. Discuss potential sales with associates early. Banks might require phased financing for larger deals.
- Large Practices: For multi-doctor practices, management structure is crucial. Engage in phased buying processes, progressively handing over more responsibility. Ensure associates are well-prepared to take over.
To wrap up, we offer a “simulated sale” service. It evaluates your practice’s value, pinpoints profit leaks, and provides insights into digital branding and market positioning. This process, if followed by a sale through us, is credited against our commission.
If there are any questions or specific scenarios you’d like to discuss, please feel free to reach out. Have a wonderful weekend!