Whether you are a first-time practice owner or someone looking to expand, relocate or add an additional location; the options for financing today have never been this extensive.

When it comes to the types of financing available for the purchase of a dental practice, the most common options are conventional banks, Small Business Administration (SBA) and seller financing.

Financing dental practicesConventional banks who specialize in financing dental practices may provide up to 100% financing. What this means is a lender may provide the buyer a loan for the full purchase price. Buyers will usually borrow additional money for operating capital or to acquire the seller’s accounts receivable. Some lenders offer this as a term loan or a line of credit or a combination of both.

Throughout the country, Small Business Administration financing is made available through local SBA lending partners. Through these programs, they offer traditional term loan options. These loans are backed by a government guarantee and the terms are typically up to 25 years. Borrowers are usually required to cover a percentage of the borrowed amount. Depending on the lender’s expertise and their SBA status, the process can be very fluid. Trust your advisors when choosing a SBA Lender.

Seller financing is where the borrower has a financial obligation to the seller for the amount borrowed. This was quite common many years ago when bank financing wasn’t readily available like it is today for most borrowers. This option is more commonly used today for space sharing situations, as a first lien position is difficult to obtain for traditional lenders.

Borrowers too often associate the best deal with the lowest interest rate. Interest rate is important but it isn’t the only factor that a borrower and their advisors should be focused on. Remember, once the contract is signed, you are the one responsible for making the payments, not your advisor.

Terms offered vary from lenders but 10-, 15- and 20-year terms are amongst the most popular selected by borrowers. With student loan debt being what it is these days, a longer term might provide better cash flow for the new owner. Before selecting the term, be sure to know what the principal reduction policy and the prepayment penalty is with the loan.

Principal reduction is where a lender provides the borrower the opportunity to reduce the outstanding principal balance by making a payment above and beyond the required monthly contract amount. Know what the lender’s policy and limitations are prior to signing their documents. Some lenders have no limits, some limit the amount each year and some do not permit any principal reduction.

Prepayment penalties are quite common. A prepayment fee may be applicable if the loan is being prepaid in full during a restrictive period stated in the contract. The most common prepayment fee is 5% of the borrowed amount in year one and declines by 1% each year with no prepayment penalty after the fifth year. This varies by lender and should be discussed and disclosed prior to executing any loan documents. Prepayment penalties present less of a concern today for most borrowers and their advisors as today’s interest rates are quite low compared to previous years.

Collateral for most lenders is a first lien position on the business. A personal guarantee of the borrower is also required.

Some non-specialized lenders might limit the loan amount to a percentage of the requested amount. This would require the borrower to inject a percentage of the loan amount from their own personal savings. An additional household guarantor and the possibility of lien position on the personal residence may also be required. Fees could be a flat amount or a percentage of the approved amount. This varies by lender and their expertise in dental lending.

Create a realistic business plan. There are many resources available to provide templates and direction. Some lenders require them and may have their own templates.

Practice of your dreamsNo two practices and no two buyers are alike. Each is unique. A buyer’s experience, historical income, savings, credit score, student loan debt, installment debt, credit card debt, household obligations and household income all play critical parts in the underwriting process, decision and what collateral might be necessary to secure a loan.

The practice of your dreams could be right around the corner. Before that day arrives, connect with an expert and be prepared.

    

Dental Practice ValuationA dental practice valuation is much like a preventative checkup on your practice’s financial health. A certified broker/valuator will take an in-depth look at the health of your business and diagnose any areas that may need adjustments or improvements. Periodically paying for a quality valuation on your business will put you in the best position to get your practice in top shape when you are ready to sell it. The cost of a practice valuation will vary widely based on the complexity of the practice(s) involved. Some factors that affect the valuation cost include:

  • Are there multiple locations?
  • Are there several owners?
  • What kind of corporation is it registered under?
  • Is it merely a baseline valuation or is it an extremely important need like an urgent health issue, an untimely death, marital or a partnership dissolution?

While these are some of the more common factors, there are a multitude of other questions and scenarios that can affect cost of valuations.

Why pay for a valuationSo, why pay for a valuation of your dental practice when you have offers to get one for free? It is key to understand that a free valuation can often cost you more in the long run than if you pay for a quality valuation. Free valuations are typically done with quick rule of thumb, or straight percentage methods of collections, or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) that can be misleading and just wrong. The problem is, the lack of specificity regarding all expenses, including everything from salaries to occupancy costs, can vary greatly from seemingly two similar practices. It is important a qualified professional thoroughly analyzes all the financials and facts of your dental practice, utilizing appropriate valuation methods and adjustments. Of course, there are other reasons besides selling a practice for obtaining valuations, which include litigation, partnerships, mergers, estate planning, etc. These too require a comprehensive valuation from a qualified professional.

Timing:

The majority of valuations are done for doctors either selling a portion or all of their practice. In this case, we advise getting valuations periodically in advance of your desired sell date – two to three years prior is reasonable. A qualified professional valuator that has done thousands of practice valuations can highlight any line items that could decrease the value of your practice or make it difficult for a buyer to get financing. The valuation will reveal the strengths and weaknesses of the practice, which will be identified by the practice valuator. The valuator knows the industry standards for dental practices and can inform the practice owner on how their practice compares to other practices in the area. This will allow the practice owner to have enough time to identify and improve on the weaknesses of a practice so that the changes have a positive effect. Again, it is best to conduct the practice valuation two to three years prior to the time the practice is out on the market to sell.

Factors:

A dental practice valuation is a professional opinion of the practice’s market value based on all the relevant information. Most financial institutions will want the same information that the broker/valuator has used to arrive at a value in order to secure financing. The following are the major items that are analyzed when preparing a practice valuation:

  • Gross income
  • Net income
  • Fee schedule
  • Staff information
  • Business hours
  • Type and condition of equipment
  • Office condition
  • Occupancy costs (high or low)
  • Type of insurance and/or payment accepted (e.g., PPO, HMO and Medicaid, etc.)
  • Total number of active patients
  • Number of new patients per month
  • Specialties and procedures done in-house and/or outsourced
  • Patient and area demographics
  • Marketing efforts
  • The practice’s goodwill

Methodology:

At ADS Precise Transitions, we perform valuation engagements and present our summary report in conformity with the National Association of Certified Valuators and Analysts (NACVA). The valuation analyst expresses the results of the valuation engagement as a conclusion of value, which may be either a single amount or a range.

The standards of value are investment value and fair market value. The investment value is fair market value without consideration of discounts. This is defined in Revenue Ruling 59-60 as “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

Most valuations are the “going concern value” type of practice value. These include the dental equipment, office equipment, furnishings, instruments, supplies, patient records, goodwill, URL, and telephone number(s) assigned to the practice.

It’s important to note analyses include, but are not limited to, the above-mentioned factors. To demonstrate a cash flow profit available to a subject practice, Federal Income Tax Returns and/or Income Statements are analyzed. Adjusted income statements are then developed from the Tax Returns and Income Statements to demonstrate the true net income of the practice.

It is from the adjusted net income that the buyer will receive the return on his/her time and investment, and service any debt incurred with the acquisition of the practice. Additionally, it is from calculation of the adjusted net income that the true cost of operations can be developed. Subject practices are analyzed using both a capitalization of earnings approach and an assets summation approach. The information analyzed includes:

  • U.S. Income Tax Return forms for 3 years
  • The most recent Income Statement
  • A proprietary ADS Profile Questionnaire
  • A depreciation schedule for the subject practice
  • An equipment evaluation
  • An in-person interview with the practice owner
  • A site visit to the subject practice
  • Financial information provided by the owner’s accountant

Professional valuation for a dental practiceAs you can see, there is a lot of information and analysis that goes into developing a professional valuation for a dental practice. The selling doctor is in the best position to get the best price for their practice and a smooth transition when they are armed with a quality valuation.

The Bottom Line:

The cost of a valuation is very much linked to the opportunity cost that you are willing to risk. It is highly recommended that a doctor should arm himself or herself with a quality valuation to get a precise report on the practice, know when they are ready to sell and if the practice is in the best possible position. A professional valuation will allow you to make any improvements to increase the value of the practice prior to the sale and supply you with documentation on the market value of your practice.

This all leads to a much smoother transition of your practice, makes negotiation and financing easier, as well as enabling you to collect the correct price for all the years of hard work you put into building your practice.

This is written by Jed Esposito, MBA, CVA, is a principal of ADS Precise Transitions. Mr. Esposito has been providing practice management transition and valuation services in the U.S. since 2003.

Contact information P: 303.759.8425 / E: jed@adsprecise.com / W: www.adsprecise.com

Tax Consequences of buying and selling a practiceOne of the most difficult decisions for any Dentist is deciding when to buy, and then later in life, sell his or her practice. It may not initially sound or feel like it, but the calculation of taxes is actually one of the easier things to deal with during transitions when utilizing guidance from your tax advisor. I say this because it is simply dollar amounts that can be planned and calculated.

As a buyer, you are likely going into the decision of purchasing a practice while encumbered by student loan debt. The thought of putting a six or seven-figure debt on top of this is a daunting proposition. However, it is going to be one of the most pivotal decisions you will ever make. While it may take some time, due consideration and analysis, eventually you will find the perfect practice for you. Not to mention the fact, that you will now be in charge of staffing, billing and other daily events in the life of a practice. These are some of the items you will find are well worth your efforts when you start calculating your Entrepreneurial Profits once you are up and running. I also mention these items to show you that calculating your tax considerations from a purchase will be the easier item to manage.

One of the most overlooked and underappreciated parts of the practice purchase negotiation is the allocation of the price. From a buyer’s perspective, you are given a better tax write-off option with the allocation amount that applies toward furniture, fixtures and equipment. This amount will allow your tax advisor various options on how to depreciate/write off this part of the purchase. Your tax advisor will be able to look at the options of maximizing Sec. 179 Depreciation election or Bonus Depreciation. These methods allow for a buyer to immediately write off purchase amounts as expenses in the year of purchase. Alternatively, they may also want to use the traditional method of depreciation based on the assets’ useful lives, usually 3 to 7 years.

First-year depreciation optionIf you are using current year income or personal funds to pay for the assets, you may consider doing a full, first-year depreciation option (Sec 179 and bonus). However, if you have fully financed this portion of the purchase, like most buyers, depreciation over the useful life of the assets gives you the ability to match expenses in the years you are paying down your debt.

The remaining amounts from the purchase of a practice are usually allocated to Client Lists, Goodwill and Covenants Not to Compete. This is typically how the majority of the overall purchase price is classified. The purchase price for a typical dental practice is classified 75% or more Goodwill. For tax purposes, these items are amortized over 15 years. This means that whatever the allocated amount is to these items, you will get the tax deduction equally split over 15 years. At first glance, one may not like this, but it is helpful in trying match debt reduction with an expense write-off.

The remaining amounts from the purchase of a practice are usually allocated to Client Lists, Goodwill and Covenants Not to Compete. This is typically how the majority of the overall purchase price is classified. The purchase price for a typical dental practice is classified 75% or more Goodwill. For tax purposes, these items are amortized over 15 years. This means that whatever the allocated amount is to these items, you will get the tax deduction equally split over 15 years. At first glance, one may not like this, but it is helpful in trying match debt reduction with an expense write-off.

When a practice purchase is financed with a bank loan, the payments on the loan principle are not tax deductions. Your deduction from the loan payments is the interest paid and the items you purchased with the loan proceeds. When you are paying down the principle on your loan with income from your practice, you have income that is spent without a direct deduction. However, as mentioned in the last paragraph, the long-term amortization of 15-year items helps to offset these principal payments in future years. These items will not line up exactly dollar for dollar, but it is always nice to have a tax deduction to offset payments on things that are not deductions.

We’ve discussed tax treatment of a dental practice from a buyer’s perspective. Now let’s look at it from the seller’s point of view. As a seasoned practitioner now ready to sell, and often preparing for retirement, a few items need to be considered and planned for as you move forward.

As mentioned in the allocation for a buyer, your allocation of sales price as a seller will go toward those same items. As a buyer, one will want more money allocated to furniture, fixtures and equipment. Now as a seller, you will want those same items allocated as low as possible. This is because, from a tax standpoint, you will pay ordinary income tax rates on the gain from the sale of those assets.

Allocation between buyer and sellerAs a side note that is not directly related to taxes, this is also the allocation that seems to cause a lot of animosity between buyer and seller. The buyer wants this figure high and the seller wants it low. From both perspectives, I always recommend that “fair is fair.” Many times a buyer and seller can look at the hard assets of a practice and eventually come up with a used fair market value. If the two parties cannot agree, then an appraiser can be hired to determine this amount. Just remember that if you wanted to sell the furniture and equipment for $50,000 but you settled on $150,000, don’t sweat the extra tax if the $150,000 was a fair value allocation. Again, what’s “fair is fair.”

The balance of the purchase price allocation that goes to the intangible assets of client lists, goodwill and covenant not to compete are taxed at long-term capital gains rates. In many circumstances, the seller will have zero basis for the sale of these items. This means you will pay tax on the full amount received without reduction. As of current tax law, you will end up paying tax at either the 15% or 20% federal capital gains tax rate. You will also need to consider your personal state income tax implications. These obviously vary from state to state. Please consult your personal tax advisor as to which bracket you will pay and how your state taxes capital gains.

It’s worth noting that a practice sale will ideally happen in a year of little or no other income. In other words, if possible, consider closing the sale of the practice in early January when little if any other income has been made. Using this strategy will keep low tax brackets available to be filled by taxes due on practice sale.

InvestmentsIt seems that many businesses and organizations are asking members to focus on what factors may influence the long-term survivability of their organizations and to make plans and recommendations to deal with those factors. The intent is not so much about organizational goals and mission statements as much as it is about the ability to physically survive into the future. Maybe the recent pain of the pandemic is the stimulus. Topics of discussion might include changing demographics, staff retention, physical property needs and cash management. This should be an ongoing process for any dentist hoping to ultimately transition the practice to another owner.

I see two phases of sustainability in dental practices, the first centering on the career of its current owner and the second, the focus of this article, having to do with the ability of the business to be transitioned to the next generation. Surprisingly, successful management of a practice for the benefit of the current doctor may not always ensure a successful change of ownership. While revenue levels (which we will discuss in detail) might be the most obvious, there are a number of other potential deal-breakers.

Six practice impacts to potential buyersReal Estate – A prospective buyer must be able to get a market-rate lease on the practice space. If the landlord will not offer the buyer a suitable lease, your practice value may be seriously reduced. Further complications may arise if the practice owner owns the real estate.

Patient Base and New Patients – Practices that do not have an adequate number of patients along with an ongoing stream of new patients to replace those lost to attrition will have a hard time being transitioned to a new owner. Since turnover in many areas is as high as 20%, the 1,500 patient practice would need to attract about 25 new patients a month just to stay even.

Physical Facility – Tired-looking and dirty practices with outdated equipment will have a hard time attracting a successor. Most potential buyers have been trained on and have always practiced with digital radiography. If you don’t have it in place it is almost a direct deduct. Likewise, curb appeal matters as today’s buyers have little desire for taking on rehab projects.

Staff – On the first day the new owner shows up at the office, they will be relying on your staff to introduce them to patients, run the schedule and operate the business and treatment systems, etc. Cultivate them as a valuable asset, but be careful about letting them become an unreasonable percentage of your overhead. If your total staff costs are over 30% of your revenues, there may be problems for a new owner.

Location – This is a tough one that you can’t do much about. If you have an otherwise marketable practice in a rural area, there is a good chance no buyer will come along before you decide to lock the door and leave.

Revenue – Of all the factors we have discussed in this article, this is the big one. In the Midwest, if you are a solo practice, general dentist and your collections are less than $600,000 annually, your practice as you know it may not be sustainable into the next generation. Below this level of revenue there may not be enough money in the mix to pay the overhead, taxes, student loans, any acquisition debt and still have money for the buyer to take out for living expenses. If there are enough other positives about the practice, it can be sold but perhaps as a satellite location or a merger candidate.

You should begin now to maximize the positives of your practice and minimize the shortcomings in order to move closer to the day when you want to successfully trade the practice in for cash. One of the most important things you can do to ensure the transition of your practice is to create a directive in the event of incapacitation or sudden death.

Hopefully, your death will be long after your dental career has ended and you have had many, many blissful years enjoying your grandchildren and hobbies. But what about the possibility that life doesn’t work out that way? What position would you, your practice and family be in if you were to receive a terminal medical diagnosis today? Obviously, the sooner the practice can be sold, the better in order to retain its value. More importantly, the less of a burden it will be to you and your family.

Life Insurance PolicyAnd what about the tragedy of sudden death? In our office, we have witnessed families struggling with disposing of practices after doctors have suddenly died. You owe it to your family, staff and patients to prepare for this very real possibility. With no instructions in place, I have seen the family make some tragic mistakes that had a profound effect on the practice and its value. For starters, we suggest:

  1. Have a current will, trust, estate plan and appropriate Power of Attorney and Medical Directive. This seems obvious but it is incredible how often these things are incomplete.
  2. If available to you, obtain a quality disability insurance policy for your “own occupation” payable to at least age 65.
  3. Obtain adequate life insurance which, at the very least, will cover any practice-related debt, including real estate and six months of operating expenses.
  4. Tell someone where your documents are kept.
  5. Meet with a dental practice broker. I know this sounds self-serving, but while we all have attorneys, accountants and executors, no one is better able to quickly get your practice valued and sold. A broker familiar with your practice and market will be in the best position to find a buyer.
  6. Consider organizing or participating in a dental mutual aid society that will come to the immediate aid of a fallen comrade. A formal agreement between 5-7 doctors can provide peace of mind in knowing that your practice will temporarily be covered in the event of your unexpected demise.
  7. Have a Memo of Direction on file with your family, accountant, attorney and the transition broker. This will facilitate quick access to information about your practice and improve the odds of a quick sale.
  8. On at least an annual basis, organize important information about your practice as if you were preparing for a practice sale. Financial statements for the last three years along with a current Profit and Loss statement, current lease, any contracts you are party to and a current list of major equipment would be a good starting point.
  9. Tell someone where your documents are kept. Tell someone where your documents are kept. I repeat this as it is often the biggest reason for a delay in moving forward. No one knows where anything is kept.

The brutal reality of sudden death or a medical crisis is something that none of us want to face but it seems to me that as many as 80% of all doctors have no plan in place. Does that include you? A little planning now will go a long way in ensuring the continuation of your legacy.

1 million dollar checkIf you’re a dental student or new graduate, you’re going to be faced with a multimillion-dollar decision soon. Would a difference of over $12 million dollars in a 30-year career make a difference to you? If so, keep on reading.

I know you’re thinking, “What kind of stupid question is that? Of course, I would rather have $12 million more instead of less when I retire.” But, if you’re truly serious about having that extra $12 million, you’re going to need to make some serious decisions and actions to make that happen.

You’re probably thinking that you’ll have to swallow a gallon of snake oil to make this incredible difference in your net worth, but actually, it’s a very simple decision and action, one taken by hundreds of thousands of dentists before you.

Several years ago, I was talking with a banker who did lending for practice acquisitions, and I asked him why so many corporate companies were forming to buy up dental practices. He looked at me like I had two heads, and then explained that while this group of investors had vast sums of cash to invest, they were only earning about 1% interest in money markets. And then they discovered dentistry and saw how they could get a 20% or better rate of return on their investment by owning dental practices. I couldn’t believe what he was telling me, so I went home and got out the spreadsheets I created for my existing clients to see how that could possibly be.

Dental GroupLooking at those actual practices and their actual financials with a fresh eye, I began to view the practice metrics like a businessperson rather than a practice broker. I made cash flow adjustments to reflect the real dental income and the actual practice expenses and, as a new adjustment, included an expense for the owner’s labor of 35% of their personal production. Subtracting the actual practice expenses, including an allowance for the owner’s labor, resulted in the actual profit of the practice. If I did not subtract the expense of the owner’s salary, I would have come up with the resulting practice net income, but realized that the practice net is made up of two components, owner’s salary and practice profit.

The key to this whole epiphany was the bottom-line profit. And this profit is what the corporate companies want out of dentistry. The real takeaway about profit that few dentists understand is that profit is a benefit of ownership, not of work. The owner of the practice, whether it be the corporate owners and shareholders or the dentist himself, gets the profit, and nobody had to work for it. Just be an owner. Then I fully understood why corporate America wants to own your profession.

Data chart

Taking this actual profit and dividing it by the price of a practice tells us the rate of return on that practice investment. I found practice rate of returns on these actual practices of 20% to 30% and even more. The highest rate of return was for a pedodontics practice which showed a rate of return of 55%!

I went on to examine a practice I was marketing at the time to see what rate of return could be realized. The practice had revenues of $1,170,000, with hygienists producing $315,000 of the gross and the purchaser doing $855,000 in work. I know that sounds like a lot of work for one dentist to produce, but at five days per week for 45 weeks per year, it would only require $3,800 in daily collections — an amount that is easily achievable. As the purchaser gathered speed and skills, this amount could be achieved in a four-day week with seven week’s vacation.

Ask any successful businessperson where you could invest money and get a 26% return on your investment and they will most likely tell you that you’re crazy. And then they will ask you where you are going to get any money to even invest. Yet, the purchaser of this practice borrowed the money for this investment and it was in place on day one. They did not have to try to save up $750,000 to invest, which never would have happened. They just borrowed it.

In addition to the profit on their investment of $213,000, they also received something else with that investment — a job! And a great job at that, paying them 35% commission for a salary of $300,000 per year! Now for the math majors in the crowd, we can deduce that the purchaser made over a half million dollars in that first year alone! For the analytical type dentists, here’s how we compute the actual practice profit.

Gross Revenues $1,170,000
Subtract Operating expenses $   700,000
Subtract compensation for owner’s work – 35% $   300,000
Add Tax Savings from purchase $     43,000
Practice Profit $   213,000

Now it’s time to address that hook that I put out there — a 30-year career and retiring with over $12 million dollars more as a result of buying a practice. Well first, consider that the owner of this practice will keep the $200,000 per year profit rather than watching it go to the corporate executives and company shareholders. If you were to invest that $200,000 profit each year at a very conservative rate of only 4% interest, and never increase that investment, even though the profit will grow annually, in 30 years that account would have more than $12 million in it. That still leaves you an increasing salary starting at $300,000 per year to live on. You have had a very lucrative career and rewarding lifestyle, and in addition, you’ll be able to retire at age 56 with over $12 million in your account.

Now if you don’t like the sound of that, you could take a job with corporate dentistry that pays 25% commission and doing the same amount of work, but probably more, due to the low paying managed care plans that you’ll be in, and your yearly income would be $214,000. Period. No profit because that belongs to your company’s shareholders. You’re making ~$100,000 less per year salary and receive no profit. Now consider that you spent eight years of your life and around $400,000 in education to be able to provide corporate shareholders with the $12 million that you could have retired with and $3 million less income over your career. Does that really make any sense?

Now you may love the idea of being an owner and receiving profit but are put off by the cost of buying a practice. If that might be the case, consider the $300,000 income generated by the hygienists of this practice and deduct the hygienists’ salaries of $130,000 and you have a profit from the hygienists of $170,000 per year. That is more than ample to cover the $120,000 per year in loan payments. So, in reality, those very nice hygienists are paying for your practice one and a half times each month. What could be nicer than that? So, if you’re worried about making those practice payments, let the hygienist do it for you. In many cases I see where the hygiene profit will pay for not only the practice but also the building as well.

And it gets even better! Uncle Sam desperately wants you to buy a practice, so much so that he will allow you to deduct the entire price of the practice as well as the interest on the loan to buy it. In this case, instead of paying $250,000 in taxes on your income, Uncle Sam will let you apply that amount to the practice sale price! That’s a one-third savings on the price right there! And in ten years, the loan payments will end, and those $120,000 per year payments will now stay in your pocket. Oh, and when you’re ready to retire, collect another $1.5 million when you sell your practice.

Any way you slice it, your option to own your own practice, be your own boss, actually work fewer hours and have more income to live on and retire on are the benefits of ownership. The owner of this practice would earn $9 million in salary over their 30-year career even with no raises compared to the $6 million earned by the employee dentist. And the owner has a $12 million nest egg at the end, and we don’t see where the employee has anything.

So, as you start your career, consider the rewards that are yours to claim or forfeit. Decide carefully when you make that multimillion-dollar decision.

InvestmentsWhile economic recovery is progressing in the right direction, its slower pace is a concern for everyone in the dental industry. But there does appear to be hope on the horizon.

The ADA started conducting biweekly surveys in March of 2020 to get a better idea of the impact of COVID-19 on dental practices. As of October 19, 2020, 99% of U.S. dental practices were open.1 And while there appeared to be a slight decline in patient volume, practice values seem to be, for the most part, holding steady.

Additionally, a recent article on Dentistry iQ indicates that the COVID-19 crisis has many dentists considering the possibility of selling their dental practices. The article also mentions that today’s market doesn’t have a shortage of potential buyers.

Many of our ADS Dental Transitions brokers have reported that a good percentage of practice revenues are bouncing back and practice inventory appears to be gradually increasing. If this recovery trend continues, it’s good news for practice values.

Reference:
1 Health Policy Institute, “The Impact of COVID-19 on the Dental Care Sector”
https://www.ada.org/~/media/ADA/Science%20and%20Research/HPI/Files/HPI_COVID_Webinar_Oct_2020_2.pdf?la=en

Earl Douglas DDS, What Now?This article by ADS member Earl Douglas will be featured in the October issue of Dental Entrepreneur.

Boy, talk about being dealt a bad hand, and that’s definitely an understatement. Who could imagine that just as I’m finishing an eight year journey to becoming a licensed dentist that the country would experience the most dire pandemic it has seen in over a hundred years and a recession as severe as this country has ever seen. We now find ourselves battered by this perfect storm of adversity.

As we seek guidance from our best experts, we discover that they are no more clairvoyant than anyone else. Our search for medical, political and economic insights results in more confusion than clarity. Then there are the friendly and helpful advisors that have great confidence in their predictions and how they can help you avoid failure and help you to achieve success. Be careful with this group as they are probably trying to engage you for their profit at your cost. However convincing they may be, they are no more accurate in their predictions than the next person.

I realize that up to this point, I have not said anything that would give you any optimism. But, we need this reality check to build some hypotheses to help create the best road map for survival and ultimate success. I do not have a crystal ball though, and anything I say, other than relaying actual observation of things that I have actually seen, may be absolutely wrong.

What am I seeing? First, I’m seeing a little uptick in the number of practices going on the market. I’ve been told by many buyers that the market will soon be flooded with many practices that sellers will practically give away. I understand the wishful thinking behind this prophesy but have yet to see any evidence of that happening. Sellers still want to get as much for their practices as they can.

Many dentists have had substantial losses in their retirement funds due to the recession. I don’t expect them to sell their practices, but rather expect that they will keep on practicing in order to earn and save money and restore their savings. That is what I saw happen in the 2008 recession. The takeaway is don’t expect to see huge numbers of practices for sale at bargain basement prices.

Young dentist smilingAnother observation that I am seeing is an increasing number of associate dentists deciding to buy and own their own practices. They have discovered in the past months that their positions are quite vulnerable. One dentist I spoke with told me of the layoff of dentists in the clinic where she works. Associate dentists are concerned that they will lose their jobs and they are beginning to realize that the solution to that danger is to own their own practice. That way they will be the last man or woman standing, and not the first to fall. They realize that owning a practice that even drops in productivity and profitability is still a better alternative than being fired from a job and having no income at all.

A third observation is how practice acquisition lenders are dealing with this dilemma. The dental-specific lenders I work with have all drawn back somewhat since they are unsure of the immediate future of dental practice economics. While you might think it’s risky on your part to buy a practice now, consider that it is the lenders who are actually putting up 110% of the money for a purchase and you will realize where the risk really lies.

Different dental lenders have a widely varying approach to current approval and funding. Each lender is grappling with deciding what additional information they need and what to do with that information in order to come up with good credit decisions. Currently they want to see how the first quarter of 2020 compares to the first quarter of 2019. They realize that many states had virtually closed practice operations during March and April and now they are looking at production and collection reports for May and June of 2020 to see how practices are recovering from the shut down. Obviously, this puts a lot of strain on sellers and their accountants to prepare more statements and reports and this will consequently slow down the borrowing process. At the present time several lenders are suspending their lending operations while others are still approving and funding loans for purchasers.

Dentist looking at a chart in a dental officeMost lenders are now offering interest-only payments for the first six months of the payback, making buyers’ initial practice cash flow much better. When the pandemic started turning the profession upside down, lenders were quick to abate payments in order to lower cash flow pressure for new buyers. This was not only generous on their part, but also a measure of self preservation. Dental acquisition loans are based on the buyer’s cash flow ability to pay their overhead, pay their loan payments (debt service) and pay themselves a good living wage and the lenders did not want to be the reason for a buyer’s, and subsequently their own, failure.

Dental practice loans are not collateralized anywhere near the value of the loan since the greatest part of the practice price is for goodwill which is intangible. It is impossible for lenders to collateralize the goodwill of the practice, HIPAA regulations being what they are. The bottom line is that lenders are depending on the success of the borrower to be repaid and they will go to any length to prevent a foreclosure which would preclude that repayment. Lenders have done whatever it takes to help buyers survive and be successful rather than take a loss on a loan. The takeaway here is don’t be afraid of your lender because your lender is dependent on your success for their survival and will do whatever they can to help get you through this and any other crisis.

Now you might ask me, “What would you do if you were in my shoes?”. Well, here’s the process that I would follow, as much as reality allows.

1. I would immediately start lining up a job, even if I hadn’t taken my boards yet. I would avoid signing an employment contract that cannot be terminated with thirty or sixty days notice if possible, and particularly avoid signing a covenant not to compete, particularly if the job were in an area where I would like to practice in the future. You would be wise to seek the aid of a qualified consultant in reviewing such contracts.

2. I would immediately start a search for a practice to purchase, even if I hadn’t yet taken my boards.

3. I would get to know the practice brokers who handled sales in my preferred area and literally beg them to notify me first of any and all opportunities.

4. I would pull my credit report and if there were any issues pulling my score down, I would get help in getting my score as high as possible.

5. I would pray for a miracle that a practice would come available when and where I wanted it.

6. If that ideal practice were to come available I would instantly do whatever it took to tie it down. Finding what you want, where you want it and when you want it is exceedingly difficult and it’s doubtful that you’ll see many such opportunities. Brokers remember prospects who don’t follow through when offered the perfect practice and those buyers may slip in priority when new listings appear.

This is the same advice I gave myself and followed when I got out of the US Army Dental Corps, so I consider this advice to be as sincere and valuable as any you will ever receive. I have shared some trade secrets in this article and in these times you will need all of the critical facts that you can get. Now I just wish you good luck, health, and success.

I would like to share some stories with you concerning a few of the transition disasters I have witnessed. Whether you are a potential seller or buyer, learning from them might help you avoid the same mistakes that some of your colleagues have made.

We will start with my first dental practice sale. Almost 30 years ago, I sold my first general dental practice. What I learned from another seller’s mistake is still relevant today.

Case #1

Dental hygienist walking out a doorI had a practice whose long-time receptionist had to move out of state before my closing on the practice was completed. Down the hall, in the same building, a dentist had just purchased a practice and had fired all of the long-term staff he inherited. Why? Because he wanted younger employees. The “fired” receptionist moved to my client’s practice, and dozens of patients followed her. My buyer’s practice grew so fast that he later started a satellite office.

About two years later the buyer down the hall who had fired his staff asked me to try to sell his practice. He was leaving private practice and going to become an employee in a large corporate practice. Why? As he told me, the biggest mistake of his career was to fire his staff when he originally bought the practice. So many patients left with the receptionist (and the hygienist) that he never recovered financially.

Lesson Learned

I tell my buyers to never make any changes in the practice for at least 90 days unless critically needed. The only change for staff and patients should be the new dentist. This strategy pays off — in over 475 transitions, I’ve only had one instance that didn’t pay off and my maximum patient loss after a sale is less than 2%.

The transition process can be smooth and uneventful. As I tell my new seller clients, “Hopefully you will only meet with me four times. The first meeting will be the practice appraisal; the second meeting will be my introducing you to the perfect buyer; the third meeting will be to review my Transition Checklist with you and the buyer and the fourth meeting will be a dinner with you and your partner/spouse celebrating your successful practice sale.” But what can go wrong with the transition process?

Case #2

Everything was going very smoothly with this transition. Due to health reasons, my seller was anxious to move ahead. I had found an excellent buyer who shared my seller’s practice philosophy, and our first meeting went very well. Then some unexpected events entered the picture.

Since my original appraisal, the seller’s production had decreased a little. The practice had a higher than average overhead that impacted net income. The buyer’s CPA wanted to reduce the price by a nominal amount, which was appropriate. My seller agreed, and I reviewed that with the CPA. However, the next morning my seller wanted to back out of the price change, but after I reviewed all of the facts with him, he again agreed to the revised price. The buyer also wanted to buy the building. The seller agreed to an option to purchase after two years. I reviewed that with the CPA, and then the next morning the seller instead wanted to give an option of only after five years. In addition, the same thing happened with the amount of previously agreed on building rent.

Finally, I sat down with the seller and explained that all of the “morning-after” changes in our agreed-on negotiations were negatively impacting the sale. It turns out that the seller’s spouse was adamantly opposed to almost all of the seller’s decisions, which explained the morning after problems. The seller finally realized how his actions were hurting the process and the practice transition proceeded uneventfully.

Lesson Learned

When agreed-to factors keep getting changed; find out the hidden reason for the apparent lack of commitment. This can save a lot of time and frustration.

Two men having a meeting at a table

Case #3

In another example, a practice transition was going very smoothly, and the practice closing was scheduled to happen while I was on vacation. I got an early morning phone call from the seller’s attorney that the sale was off, and the two attorneys weren’t talking with each other anymore. Apparently, the buyer would not agree with the triple net lease for the seller’s building. It was non-negotiable, per the buyer’s attorney. I knew the buyer very well, due to working with him in the past. He had agreed to the lease, and he had an option to purchase the building in five years.

I called the buyer and figured out that he did not understand exactly what a “Triple Net Lease” meant. After I explained to him that since the practice expenses already included the property taxes, insurance, and utilities, he would not be paying more in expenses than he had already agreed to pay. Problem solved – he was ready to sign the Sale Agreements and the closing could continue. However, the attorneys still were not talking to each other, so I had to call the buyer back and tell him to instruct his attorney to contact the seller’s attorney and tell him the Sale Agreements were acceptable.

Lesson Learned

Legal and financial advisers are usually critical to the success of a transition. However, sometimes they lose sight of the goal of a “win-win” result for everyone. It may necessary for both buyers and sellers to think for themselves and not be held captive to their advisers.

Case #4

My seller had purchased his practice about two years earlier from a retiring dentist that owned the office building. However, changes in family plans were going to result in an unexpected move out of state for my seller. My client had grown the practice and improved the clinical and physical attractiveness of the practice. It did not take long to find a qualified buyer and a closing was scheduled.

Usually, it is easy to get a new lease for a buyer when the landlord wants a good long-term tenant. That is why most leases have an assignment clause that the landlord will not unreasonably withhold its consent to assignment to a new qualified tenant. Wrong! My seller’s lease stated that the landlord could “Unreasonably Withhold Consent” to an assignment. After over two months of back and forth negotiations between attorneys, a new lease was finally obtained for the buyer. Apparently, the landlord was upset that my client was leaving his patients after only two years, and he was unwilling to grant a new lease to punish my client.

Lesson Learned

It is important to read all documents before you sign them. For some reason, my client’s attorney that handled the lease when my client bought the practice must have missed this important wording change. It cost my client two months of unexpected moving problems, since he had sold his house, arranged new living quarters at the new location, but then had to find temporary family housing in the meantime before moving.

Case #5

My oral surgery client was ready to retire. I did an appraisal, recruited an out-of-state buyer, and negotiated a Letter of Intent to purchase the practice. Only one thing needed to be done before closing the sale. My seller client met with his CPA to finalize his retirement financial picture. The adviser told my client he did not have enough money to retire and should work for another year or two to build up his retirement account. Luckily the buyer had not quit his job and relocated yet.

Lesson Learned

My recommendation to my clients is to start their retirement transition planning about two years before they are ready to retire. This includes having an appraisal done so that the future practice value can be included in retirement funding. A comprehensive appraisal can also point out aspects of the practice that can be changed to enhance salability and potentially the future sale price.

Case #6

I helped with the sale of an excellent practice in a city with a high livability index. Unfortunately, we had well-qualified buyers who individually dropped out at the last moment before closing. My seller client had found the first excellent buyer. However, during negotiations for a Letter of Intent, the buyer insisted that my seller purchase a $100,000 Cone Beam x-ray as part of the sale – without changing the sale price – so that didn’t happen. I then recruited a buyer who dropped out two weeks before closing due to a sudden disability; another well-qualified out-of-state buyer couldn’t get out of his partnership at the last minute because of his partner’s financial difficulties. Fortunately, the next recruited buyer allowed the transition to move ahead quickly.

Lesson Learned

This is what my seller client said: “A great part of our success was due to Gary’s patience and due diligence through the multiple progressions and setbacks we experienced during the sale process. In the end, it turned out to be the most perfect fit!” Actually, my client’s timing flexibility was more critical to success. So, hope for a quick transition but be prepared for the long term.

Case #7

An attorney that handles many of my transitions told me this story: The buyer was working on the East Coast and was buying a practice in the Northwest. He quit his associateship, sold his house, and moved his furniture to a temporary location. Then the seller said he was not ready to retire, backed out of the deal, and the buyer had to live with in-laws in the Southwest until a new practice could be found.

Lesson Learned

Never make any final commitments until the legal Sale Agreements have been signed. If a buyer (or seller) backs out at the last moment, you have legal means of enforcing the transition. I tell my seller clients to not make any changes in patient scheduling or send out patient/referral source letters until the Sale Agreements are signed.

Case #8

Empty dental office with dentist chairI had a seller who was ready to retire. He had an excellent practice, with a great location and a high net income. The well-qualified buyer I recruited was anxious to take over the practice. However, my seller always seemed to have a “last-minute problem” with the timing of the sale. The projected closing date was postponed three times and after six months my buyer gave up and looked elsewhere. Finally, I was able to schedule a firm transition date with a new buyer. As part of a transition, I help my sellers with their transition announcement letter to patients and referral sources. As we were looking through some of my patient letter examples, my seller adamantly stated “I will never use the word retirement in my letter and with my patients.”

Lesson Learned

Obviously, my client was struggling with the concept of retirement. An attorney I work with told me that he didn’t know anyone who “held the hands of his clients” as much as I do. I feel that over 75% of my job is dealing with the emotions of my sellers and buyers. The other 25% is handling the nuts and bolts of practice transitions. Dealing with “Life after Practice” can be difficult. In addition to financial considerations, there can be a great deal of emotional and psychological barriers to take into account.

Today, even after more than 2,100 appraisals and 475 transitions, I still learn something new. Most importantly, the role of a dedicated and experienced transition consultant cannot be overlooked when it comes to helping ensure a successful transition.

Dentist working on a laptopAs an entrepreneur, a successful dentist, a respected part of the community and a business owner, you will at some point have to make the decision to exit. Do you have an associate willing, able and financially capable to buy a portion or all of your practice? Some, unfortunately, make a terrible, and most likely very costly, mistake of trying to do it alone. They may ask their accountant or attorney to help or share with their colleagues their desire to sell.

The truth is, the initial planning to sell should have started before the decision was made to sell. In the back of your mind, you probably said, “I can see myself doing this forever. Someday I will scale back my hours, take a day or two off during the week, travel the world and practice as much and whenever I want.” This is a common plan for a lot of professionals. In more recent decades, the decision to sell has come sooner than later while the demand and value is at or near its best mark.

Business-person with laptop and papers

Reasons for selling

But why sell? Is it due to age, your number of years in practice, health, wealth, death, disability, attitude or burn out? Could it be the results of business issues, the economy, life or personal situation or a social development like the pandemic? neighborhood, competition, There are all kinds of reasons for wanting to sell a practice. But it’s important to remember that if there is an urgent or pressing issue to sell, the value might be impacted.

The value of the business is based on a number of variables, but consistent revenue, stable cash flow, condition of the facility and location are the main drivers. A general dental practice in a metropolitan or suburban community will most likely sell quicker and for more profit than a practice located in a rural location. The same is to be said for a specialty practice and its location.

Two people shaking handsWhen it comes to selling a practice, a scheduled exit is ultimately the most ideal way to do it. Giving yourself three to five years to plan is a good start for preparing your business. First, meet with a dental industry expert to determine the current value of your practice and reconnect each year thereafter to update the value. The next step is to do some housekeeping, maintenance, repairs and reasonable updating. Flooring, paint, ceiling tiles and lighting are relatively inexpensive. Declutter and enhance the appearance of your office. Clean up and maintain the outside as well. It isn’t wise to overly invest a significant amount of capital into new equipment and technology if you are planning to exit in less than 24 months. Clean up the financials, accounts receivables, insurance plans and fee schedules. Clean up your overhead. This includes staff, supplies, lab, subscriptions, meetings, meals, travel and office lease if possible. Consider having your consultant speak with you and your financial and tax advisors to prepare for the cash injection that you will be receiving when the practice is sold.

Three to Five Years

Giving yourself this three to five-year window gives you the ability to enjoy what you have created, and potentially increase the value of your practice. By exiting on your terms, you’ll be able to better adjust to the industry and the economy. The demand and market conditions will change over time from a seller’s market to a buyer’s market and vice versa. The insurance companies will continue to adjust as they have for years. The lending institutions will adjust to industry trends impacting or improving a buyer’s ability to secure financing.

18 to 24 months out

At 18 to 24 months, it’s time to put the wheels in motion. Is the business ready to be sold? Did you complete and maintain the housekeeping? Are you ready? If the answer is “yes,” contact your consultant to take the practice to market.

Infographic - When to start planning to see your practiceWhile your practice in being confidentially marketed by a qualified and reputable transition specialist, it is critical to maintain business as usual. It’s important that you do not disclose or discuss your plans to sell. A professionally prepared offer should be packaged and presented to the buyer and their advisors after a non-disclosure document is signed. After they have reviewed the materials, they may seek to see the office. This should be done after hours and your consultant should be present. Don’t be discouraged if the first person to see your practice doesn’t make an offer. These things take time.

Once your plan is put into motion, relax and trust the process. With an experienced team by your side, you can take comfort in knowing that regardless of what lies ahead, you are better prepared for what life has in store for you.

Empty dentist chairWhether you’re looking to transition and sell your practice or you are interested in buying a practice, the pandemic has put the brakes on a lot of dental professionals’ efforts. The current concern and hesitancy is understandable, but is it justified?

Our latest white paper analyzes the current situation by looking at the marketplace pre COVID-19 and the factors that impact the value of a practice today. From post pandemic considerations for valuing a practice to preparations to keep in mind when getting ready for a transition in today’s environment, we’ve put together some solid observations and advice to help you in this uncertain time.

Download our white paper today and learn how to more effectively deal with the impact from the current COVID-19 crisis, protecting practice value and moving forward in a way that best serves your interests and those of your patients.

Download Now!