Dental transitions are very much like the PRACTICE of dentistry in that we all know that years of “practice” is usually the key to excellent dentistry. While we were all confident that we received great training in dental school, most of us realized that only years of practicing in one location was truly the yardstick on how ‘great’ we really were.
We learned to make better decisions on what truly would work in the long run, and in the short run for that matter. Dentists are smart people and have earned that “Doctor” in front of their name. However, it does not mean that we would be the best option to set a broken arm or take on that massive remodel at your summer cabin. We would hire a specialist who is trained in their field, knows what to expect and can anticipate and avert any crisis before it occurs.
Expertise is About Making it Look Easy.
Our most satisfied patients are the patients that felt the procedure was quick, painless and almost effortless. This is usually the result of years of honing our dental skills. In fact, when that does happen and the patient questions why the bill is so high, I assume that we all explain that it is our experience that allowed us to complete the procedure in that fashion. We’d never explain all the things that could have gone wrong, or close calls that we were able to avoid.
Practice transitions are the same. While I wish that they were all short and painless, the litigious nature of our society and the financial stresses on the young graduate are making transitions more difficult than ever.
It is important to have an experienced broker on your team who has been in the trenches for years and has had experience in all types of dental transitions. So, hire a reputable dental broker to guide you expertly around the twists and turns that you’ve not anticipated. And, if you choose to hire an attorney, choose one that specializes in dental transitions. And remember – You don’t know what you don’t know!
Please contact ADS Dental Transitions to discuss some of our tremendous opportunities.
Recently, a retiring doctor perused the website of a large and trusted dental insurance company and found information relating to practice sales. Part of that information included letters for sellers to give to their staff to make sure the selling doctor would be in compliance with state labor law upon the close of sale. The seller gave this letter to his staff and the following week, when the buyer arrived for his first day after the purchase of the practice, half the staff did not show up for work!
The buyer was rightfully shocked as a full day of dentistry was scheduled. The letter was incredibly blunt about the reality that the previous business no longer existed, therefore technically they were all fired. The selling doctor swore that he told the staff verbally that they all had jobs with the new buyer, but obviously the letter made it seem as if all their previous years of employment did not matter.
Preserving Goodwill is Critical.
Goodwill is 75 to 80 percent of the value of any existing practice. Once the selling doctor is out of the office, the staff represents much of that goodwill.
While the selling doctor in our above situation might have kept himself from being sued for some sort of labor law infraction, he set himself up to be sued by the buyer for harming the goodwill of the practice with that letter to the staff.
The trusted website also stated, “the buyer is not bound to keep the staff or status quo.” It encouraged the buyer to look at all the current policies and then announce all changes to the staff, stating that all employees should then sign, initial and date these changes in the employee handbook. Doesn’t that sound like a great way to get new staff to love you?
Bad Advice Yields Bad Results. Question Everything.
Of course, the poorly written information from this company carried a disclaimer, but that won’t help the dentists who have followed that bad advice. This is not the best way to sell a dental practice. I strongly recommend to our buyers that they keep the staff salaries and benefits the same for at least 3 to 6 months before making any changes.
After perusing this document and the related website myself, I did find some good pearls of information, but there were several other areas of misinformation that most dental attorneys in the field of transitions would also disagree with.
Don’t believe everything you read on the internet! Ask questions of experienced dental attorneys, dental accountants, dental brokers and dental consultants. If some opinion seems confusing or contrary to what you would think makes more sense, ask them to explain.
Normally there will be a good explanation as to why most of us in this industry give similar advice.
Please contact ADS Dental Transitions to discuss some of our tremendous opportunities.
In the 20 years I have been involved in dental practice transitions, never has there been such a discrepancy in the interest of practices in the big cities as compared to the rural areas.
Practices in small cities like Chico garner almost no attention, even after most of the town of Paradise had to move there after the fire!
In the early 1980’s I remember hearing Jim Pride DDS, founder of Pride Institute, tell us young graduates to leave the city, make more money than our city counterparts and come into the city to take our counterparts out for dinner on the weekends while enjoying whatever entertainment the city provided! Even 35 years ago, many rural areas provided the opportunity to make more money doing the same amount of work. With the current rising prices of everything in the cities, that is even truer today, but the city trend is even stronger.
Why be a country dentist over a city dentist?
I believe the reasons behind the increased trend are the millennial mindset and the staggering student loan debt crisis. I believe millennials are more inclined to stay in the cities and work as associates. Some of that reasoning may come from the fact that their student debt is so much higher than previous dental graduates. However, I do not think they realize that Jim Pride would be even more correct today than he was 35 years ago.
Let’s look at some of the reasons to consider a smaller city.
Less competition is one of the most obvious reasons. Many of our “rural” practices have higher collections and higher fees than our city practices because they do not have the competition.
Stronger and more loyal patients is often the case for “rural” practices, especially if you plug into some of the local community and school activities.
Buying a dental practice in “rural” areas.
If the normal metric for a practice sale is around 75% of collections in the city, the metric for the rural area might be closer to 55%. Also, the million-dollar collections practice in the city probably nets around $300K, whereas the rural practice probably nets around $400K. Therefore, you might be able to purchase a practice in a rural area for $200K less, but also take home $100K more per year.
This does not even take into consideration that the cost of living in a large city can sometimes be a factor of double the cost of living in a rural area!
What about cost of living? Oh, it’s a thing, alright.
Utilities, groceries and transportation are generally higher in the city, but the biggest reason is obviously the cost of housing can be up to 4 times higher in the city!
While the rising cost of dental school is frightening, the extra costs to live and work in the city compared to rural areas dwarfs that staggering student loan amount!
Please contact ADS Dental Transitions to discuss some of our tremendous “rural” opportunities!
The single-most important factor in determining the practice sales price is the collection total of the previous calendar year. Lenders and buyers like to see stability without large variances from year to year. It should be obvious that steady, slight increases in revenues are always better than even the slightest of decreases. Poor performance of one of three years should not affect pricing, unless it is the last calendar year that shows a significant drop. Therefore, try to maintain a stable practice, make sure you finish strong and make all your December deposits for that last year you will be filing! Practices are priced based heavily on gross receipts. All these items can make for a strong valuation.
Understand timing when it comes to investing in your practice.
Let’s work through some scenarios and options. If you plan to practice 2-3 more years before you sell your practice, it is not worth investing extra money in the practice. In this case, I would just advise finishing strong, especially to reflect your last tax return which will be filed.
If you plan to practice approximately 5 years, spending large amounts of money for new technology may not necessarily return the investment unless it helps to increase your production. However, this being said, purchasing new equipment may increase your enjoyment of practicing dentistry and therefore be a worthwhile investment.
With 8–10 years remaining to practice, modernizing the practice with the latest and greatest is generally a great idea. Leasehold improvements typically last 5-8 years, so making the investment at this time to spruce up the office with tangible assets will enhance the desirability of the sale. It may also give you greater satisfaction of working in a first-rate environment for the entire duration of the leasehold improvements. Most importantly, since many valuation methods are based on gross receipts, keep up the good work!
Please contact ADS Dental Transitions to discuss some of our tremendous opportunities.
Mergers are unquestionably the best return on investment you can make. The success of EVERY transition or merger assumes the vast majority of patients will stay with the practice and transfer to the new dentist. This is generally true when the transition is handled properly and both parties understand that the “goodwill” portion of the transaction is the most important aspect. The hard assets, such as equipment, supplies and leasehold improvements have a limited life and will always need to be replaced. However, the patient base is what generates the CONTINUOUS revenue stream.
“I’ve heard of chart sales, what are those?”
Chart sales refer to a simple purchase of the physical charts, but not necessarily receiving any additional help in the transfer of the goodwill. A chart sale might not even include the transfer of the phone number from the previous dentist. In addition, true “chart sales” are done at extreme discounts compared to what the price might be in a traditional practice sale.
Mergers, on the other hand, assume that the transfer of the goodwill and patient base will be as successful as in a normal practice transition. With a successful merger, the return on investment is normally double the return on investment from a traditional practice transition because the overlapping expenses such as rent, phone, electricity and roughly half of the staff salaries will be eliminated. Therefore, if a normal dental practice profit is approximately 35% of collections, the profit from a merger can be as much as 70% of the collections.
Think about it: If you can add 1,000 patients to your existing practice, the only overhead will come in supplies, lab costs and some staff. This revenue is ongoing year after year and that is the reason a merger is like having your own ATM cash machine!
How Much Should You Pay for a Merger? Sentence case?
If the return on investment for a merger is twice that of a typical practice transition, shouldn’t the price for a merger be twice as much? That would make sense from a business perspective, but the reality is that most buyers feel that they should get a large discount on a merger verses an outright practice purchase. The argument is they don’t need the equipment or the space. My advice to young buyers or doctors that want to expand their practices is to unquestionably pay the market price or more if you have an opportunity for a merger. This is about return on investment, not equipment. Even if you took every piece of equipment to the junk yard, it would still be worth paying over the market price for a merger opportunity. Again, there needs to be cooperation to ensure that the vast majority of patients make the transfer to your location, and when they do, it will be the best return on investment you can make!
Please contact ADS Dental Transitions to discuss some of our tremendous opportunities.
If you’re considering selling your dental practice without the help of a professional, take this quiz to make sure you’re both physically and mentally ready. The key is to be able to answer all these questions as “true.” If you go through the quiz and you have concerns, you may want to consult an ADS broker.
There will be lots of buyers. I already have some in mind.
I know what reports and financials are needed to provide to buyers and their lenders.
I refer a decent number of procedures out. Buyers will see the potential and be willing to pay for the growth.
I know what EBITDA is and why it is important to a practice valuation.
Articles suggest that a revenue multiplier is the best way to value a practice.
As a business owner, I need to make any normalizing adjustments.
My labor costs and operating expenses are in line with the industry.
My insurance plans are up to date and my fee schedule was recently updated.
Annual production and collections are the most important things to buyers.
Smaller practices are easy to sell because the buyer can grow them.
Larger practices are easy to sell because there is so much cash flow.
Student loan debt makes it impossible for buyers to get 100 percent financing.
What will lenders need in order to underwrite the loan?
Letting a prospect “shadow” you for a few days is a good idea and very common.
After you accept an LOI, it’s a done deal.
What is involved with due diligence and how long should that take?
Is the accounts receivable part of the deal? I’m excluding the accounts receivable from the purchase.
What happens to leased equipment in your office?
Landlords are generally willing to create a new lease in your buyer’s name.
I have an attorney who will prepare the purchase contracts.
The above list could go on and on as there are literally hundreds of questions and, depending on the answer, there could be many more. The goal is to maximize your sale price while selling your practice to someone who will take care of your staff, your patients, and your legacy. To avoid a potentially costly mistake, take the time to speak with one of our experienced and competent brokers. We will be happy to help you answer any tough questions and guide you through a more confident, lucrative and as painless as possible sale.
If you’ve decided to buy your own dental practice, there are some important questions you may want to consider asking the seller, once you’ve found a practice you’d like to purchase. It’s important to be prepared for what is ahead. Your best option is to surround yourself with an experienced team of professionals, in addition to your broker, like a CPA and attorney who specifically focuses on dental. These professionals will help you avoid overlooking important items.
However, even though you’ve hired a team for their expert assistance, as a buyer, it’s still critical to understand a few basic questions to ask. For example:
What is the overhead and profit margin in the practice?
What procedures are referred out?
How many active patients are there, and what is the average number of new patients per month?
Are collections back on track in 2021, as compared to 2019, given that 2020 was an off year due to COVID?
Are you open to a transition period of a few weeks to complete treatment in progress and provide mentoring?
Buying a dental practice is a complex process that involves far more than finding a seller and closing the deal. It’s important to have all the background and solid guidance. You want to find the right seller who has a practice that fits your dream.
You’re ready to sell your practice and you want the best result possible, so common sense tells you to list your practice with as many brokers as possible. It only makes sense, right? When I am contacted by these sellers, they are often surprised by what I have to say.
My best recommendation for sellers is to interview several brokers and pick the one they trust most. That is, trust them to be the best at their job, trust them to be honest and then give this broker an exclusive listing to sell their practice … even if this broker isn’t me.
Let’s stop and think about this process a moment. First, all buyers are likely to speak to brokers who have a desirable practice, so all brokers will be talking to the same prospects. Why? Because we all fish out of the same pond. You will have three different brokers telling three different stories about your practice to the same prospect. Sometimes, this can leave the prospect confused, and they may well just dismiss your practice and move on. Too many cooks and brokers really do spoil the broth.
This gets extremely complicated when some brokers update the listing with new financials and others don’t. I saw one sale where one broker updated an up-and-coming practice and got a full price offer for it. Then the buyer saw the other broker’s ad with a price that was $100,000 less because that broker failed to update the figures. The outcome was that the seller had to accept the lower price because his other broker advertised it for less.
It’s important to know many brokers deal primarily with exclusive listings. Why would I want to spend my time, money, and effort to sell a practice only to have the owner or another broker sell it? I would receive nothing but an expense. This is especially true when I have clients who have committed an exclusive agreement to me, and they expect and deserve my commitment in time and effort back. I’m happy to honor that exclusive listing because I know when a sale takes place, I’ll be paid for my efforts.
If you look at a broker’s priority list, the exclusive listings are at the top and non-exclusive ones are on the bottom. When you have an open listing, you will be on the bottom of everyone’s list. You would be better served being at the top of an excellent broker’s list. One with whom you share a sales commitment.
When I used to accept open listings, I discovered I was not only competing with other brokers, but also the owner who had the advantage of bargaining with my commission to get a better price for themselves. I quickly discovered when I competed with my client, I always lost. I did the work, and he got the benefit … so I stopped doing that.
Don’t be surprised when a sale takes place that several brokers will claim that they were the one who brought the buyer to the table, and they all want their commission. Good luck convincing them that you’re not going to pay them.
If you want the best exposure, find a broker with a national access to buyers and who can collaborate with other brokers. I have shared commissions with other brokers who referred a client and was able to maintain all the advantages of an exclusive listing while getting the greatest exposure to buyers. But there’s no question that sellers and brokers get the most benefit when there is only one captain of the sales ship.
In the first 25 years of our company’s history, dating back to 1993, 100 percent of our transitions were from one solo practitioner or partnership to another. For some buyers, this might have been their second, third, or even fourth office – but they were all dentists who would have direct involvement in the practice they were buying. The final act of each closing was to take a picture of the selling doctor handing the keys to the buyer, smiling faces all around as one dentist passed his or her legacy on to the next buyer.
The last several years indicate these types of closings will be less and less common as DSOs – dental service organizations – become a larger segment of the buyer pool. DSO penetration here in the Central Plains has lagged other parts of the country such as Texas, Florida, Colorado, and the Northeast, but it’s safe to say private equity-backed dental groups are here — and they aren’t going anywhere. According to a recent presentation by Aligned Dental Partners, DSOs are expected to represent nearly 30 percent of all dental practices by the end of 2021, with the following breakdown by size:
Elite Groups (75+ locations): 39
Mid-Market (10-74 locations): 265
Emerging (1-9 locations): 1,239
The DSO model goes back several decades, but it wasn’t until the mid- to late-1990s that pioneers such as Heartland and Aspen began to emerge at scale. It is the recent rapid expansion of the Emerging and Mid-Market groups that are now making the biggest waves and presenting more intriguing options to potential sellers. While most of these groups would still prefer for the seller to continue working, many of them are associate-driven or have local equity partners that may make it possible for the doctor to sell and not have to continue working for three to five years.
Most dentists over the age of 55 are bombarded with daily direct mail and other solicitations about how they can sell their practice to these organizations. Given the wide range of DSOs and their unique cultures, practice philosophies, support services, reputations, and financial outlooks, it is important for dentists to conduct their own due diligence as they start to go down the path of selling to a DSO.
Here are six important questions to ask if considering selling to a DSO.
Are there traditional buyers for my practice? If there is significant demand in your market for practices like yours, then you have options beyond selling to a DSO. Don’t buy into the rhetoric that young dentists aren’t buying practices anymore because they can’t get financed or any of the other reasons being thrown out there. There are plenty of eager, financeable buyers actively looking to get started as an owner operator. It is important to understand the market and know the different choices you have to exit your practice. Depending on your goals, a DSO could still be a solid choice, but certainly not your only choice.
Do I fully understand the terms within the offer? There is a perception that DSOs will pay a significant premium on the practice purchase price compared to a private buyer. While this can be the case, doctors need to look at the full picture to see if it is as great a deal as it may seem. Is the purchase price paid in full at closing or is there a hold-back or earn-out? How will you be compensated for the work you do post-closing? Will some of the purchase price be structured in stock instead of cash? There are countless ways to structure these deals, so be acutely aware of the components in the offer beyond the purchase price.
Am I required to work for any period after closing? Flexibility with your willingness to work post-closing expands the number of DSOs that may purchase your practice. The fine print in the employment agreement may be the linchpin that either makes the deal worthwhile, or a poor decision. Unless you are fully confident that you can endure the three to five years that most DSOs are looking for, you may want to pursue other options, where your payout does not have employment demands attached to it. As mentioned earlier, some of the smaller and emerging DSOs are beginning to shift away from retaining the seller as a requirement, so an increasing number of exit options may be available.
What short-term and long-term changes can I expect to see? Most DSO-acquired practices should expect to see an immediate shift into the DSO’s centralized support services, which often includes changes to practice management software, operating hours, payor mix, dental supplies, labs, etc. Expect a rebrand to happen within the first 12 months. Be sure to understand the DSO’s clinical philosophy and approach to treatment planning, as this would have the most direct impact on staff and patients.
What will happen to my staff? Most of the time, the DSO hopes to retain the staff. They are also able to offer the staff certain benefits that a solo doctor rarely, if ever, can provide. Still, you need to understand any changes to headcount or compensation.
What would previous sellers say about their experience with the DSO? Ask to speak directly to other dentists who have sold to the DSO. Find out if they had a positive experience and if their staff and patients have been treated fairly.
In today’s rapidly changing market, dentists have numerous options to sell their practices, yet most do not know where to start or what is involved. ADS transition specialists are uniquely positioned to leverage their experience in the marketplace to help sellers explore these various options to achieve the things they want most: legacy preservation, competitive pricing, staff protection and the right dentist or group to take over the practice. Whether that is selling to a DSO or finding a more traditional owner operator, your local ADS consultant can guide you through the process.
We are emerging from the most surreal time that we are likely to ever encounter in our lifetime. All of us have paused to reflect on what has happened and what to expect next. For many of us, it has been the unexpected deaths of loved ones. The dental profession has been touched by these losses as well.
The core of a dental practice is the dentist. So, what happens when the owner dentist is no longer able to operate their practice? Patients are not being seen and treated, and what was once a thriving practice can quickly become merely a closed office.
Have you given much thought to how your loss would affect your survivors? If something happened to you tomorrow, would your loved ones be prepared to take the appropriate steps to efficiently and quickly sell your practice for its highest value?
Knowing the value of your practice is not only essential for planning your practice sale and retirement, but also for estate planning, and most critically for being prepared in the event of a death or disability of the owner.
Having your practice valued for the first time will be a daunting task. The amount of information that is needed for a professional valuation is considerable. You will be gathering tax returns, profit and loss statements, equipment lists, employee information, insurance plan details and much more information about your practice. It is literally a cone beam analysis of your practice. Also, this information will be required to market the practice most effectively by buyers, their advisors and lenders in order to be able to bring a sale to its conclusion.
In the event of an unexpected loss of an owner dentist, if there is not a current valuation, at least within the calendar year or preferably semi-annually, this critical process must be accomplished by survivors who don’t know what to look for, where to look or who to call for help. Their attention is focused on grieving and making arrangements, so it’s no wonder many valuable dental practices are sold at fire sale prices, if at all!
I recently had this exact situation happen when the surviving spouse reached out to me, not knowing what to do. Another dentist in the area offered her what she felt was a ridiculous price for her husband’s practice. She had no idea what the practice should be worth, much less what the gross collections were. In addition, the practice had been closed due to the loss for weeks with no plan in place to re-open and the employees had already found other employment. As it turns out, the offer she received was actually a decent offer, due to the current status of the practice. If her husband had a valuation performed and updated yearly, and provided a contact to sell the practice, search for locum tenens dentists, and market the practice broadly, the outcome would have been much better for her.
Some practice transition consultants will offer a “Free Appraisal” or “Free Valuation” of dental practices. This is most likely an Opinion of Value based on a Rule of Thumb method rather than an actual valuation. Therefore, it’s important to understand the difference between the two.
To arrive at a value, a Rule of Thumb uses limited information accomplished my multiplying the gross revenues by an arbitrary percentage. “The practice is worth 70 percent of gross revenue,” or “The practice is worth one times net income,” are the most prevalent rules of thumb. Neither of these methods accurately reflect the worth of any practice, much less all practices.
A dental practice valuation is based on a great deal of extensive practice information and is presented in a professionally written report.
When you reflect on Who am I, really?, What worries me most about the future?, or What matters most in my life?, as uncomfortable as it is, reflect on What would happen if all of a sudden I am not here? Get a professional valuation performed by a professional transition specialist and have it updated at least annually. Having all of this information on hand and instantly available will relieve your survivors of a tremendous amount of stress and frustration.
Christine Elliott, Lic. R.E. Broker, is a dental transition broker with The Transition Group, LLC and a member of ADS Transitions.