Dentist signing a contract

Whether you’re buying or selling a dental practice, one of the most important initial documents is an Offer to Purchase (OTP). This signed document lays out the price, terms, transition, and real estate (if applicable) of a practice being sold. Recently, we’ve seen buyers increasingly use a Letter of Intent (LOI) to make the offer, especially when the buyer is a corporation or a DSO. When an individual dentist is the buyer, however, a simple, one-page offer form is often all that is needed to agree to the basic terms of the deal and move forward. A broker is prepared and can easily create a personalized OTP document for you.

Dentist shaking hands in front of dental chair

One page is more than sufficient to lay out the basics of the deal, including:

  1. Buyer’s name & address
  2. Seller’s name & address
  3. Assets being purchased
  4. Assets not being purchased
  5. Price
  6. Terms of payment
  7. Transition details
  8. Real estate (if applicable)
  9. Contingencies
  10. Anticipated settlement date
  11. Signatures

At this stage, regardless of the document that is used, from a simple offer form or a formal Letter of Intent (LOI), it is non-binding. The specific details will be worked out in the Asset Purchase Agreement (APA) by attorneys for both parties. The sooner the offer form is agreed to and signed, the sooner the buyer can secure financing, begin the credentialing process, give notice to an employer if necessary, and allow the attorneys to begin working on the APA and other contracts.

A formal LOI often goes into more detail than is necessary in the early stages of a dental transaction. Also, it often involves the attorneys at an earlier point in the process, which can slow it down and lead to unnecessary costs for both parties.

If you have any questions about how to structure an OTP, your ADS specialist is ready to help.

Kevin Cooper, MBA, is a Practice Broker with American Practice Consultants.

Dentist standing in office with staff

None of us want to discuss or think about death or long-term disability. Humans cope with the possibility of death by ignoring it, which leads to a lack of preparation when the inevitable happens. In any given year, 10-40% of our dental practice transitions are the result of an unexpected death or disability, and less than half of those clients are adequately prepared for it. I’ve lost count of the different ways dentists find to die or cripple themselves, from the run-of-the-mill heart attack to freakish accidents you would swear came from a movie. No matter how it happens though, it is usually sudden and with little warning.

Usually, I receive those dreaded calls about someone I don’t know well, and I try to comfort the family left behind. There are no words that really provide comfort, so my primary job is to see if I can assist in maximizing the return on the sale of the deceased’s dental practice. Time is the greatest enemy in distressed practice sales; purchase offers decrease immediately upon death and all but evaporate within a few short months. Consequently, practitioners should prepare their spouses or loved ones to bring the practice to market quickly once a tragedy occurs.

When a death occurs, the survivors move in a fog and are usually unable to think clearly or make important decisions. So, please be sure to leave your family and employees some guidance on what to do with your practice. If the data is readily available, we can act quickly. However, we are often left piecing together records and searching for information in order to bring the practice to market.

Two women looking over paperwork

  1. Have a will and update it every few years. Either execute a codicil with instructions for your practice, or leave a letter of direction for your heirs to follow. Designate a lead advisor for the practice sale (CPA, attorney, broker, etc.)
  2. Have an emergency plan with the office staff. Make a list of possible substitute dentists who might help keep your practice open in an emergency. Have a plan for rescheduling patients. Providing a game plan to the staff helps keep morale up during a highly stressful time.
  3. Write down user IDs and Passwords for your practice management software and other accounts. Review this list every three months to make sure it is still up to date.
  4. Start a spreadsheet with all of your assets, including account numbers. If you have a safety deposit box, write down the bank name and address and the place you keep the key. If you have any debt, please include a section with bank names, account numbers and amounts. Mark your phone to review and update this list yearly and tell your spouse or eldest child where to find this list.
  5. Gather the information needed for a practice appraisal: 3 years tax returns, staff payroll data, office lease or building appraisal, etc. Update it yearly.

Although your dental practice may not be the largest asset you own, the sale of your practice will help your loved ones to start moving on. Obligations to patients for completing treatment and record maintenance do not end with death. Payroll, rent, and other office debts will continue to accrue, and the additional burden of office management is highly stressful to surviving family members.

I hope you have a long and happy life. However, it surely would help if you took just a little time to prepare for the worst.

Preston Lovelace, JD., MS. is president of ADS Lovelace and Associates and is a member of ADS Practice Transitions

Dentist shaking hands with another person

Many of us have probably heard from individuals who think sellers don’t need a practice broker to sell their dental practice. That is one side of the story, but in this case, it really pays to hear both sides. To that end, let’s look at the advantages of using a practice broker.

  1. Brokers have the best insight into the true value of a practice. I’ve seen university professors use calculus and involved formulae to value a practice. They have never sold a practice and did not know at what price it sold, if it sold at all. Brokers have to back up their valuations by bringing that amount of cash to the table, and it doesn’t help to overvalue a practice only to not have it sell, or to undervalue it and leave money on the table. Brokers will have the best estimate of a practice’s true value.

  2. Brokers can inform your accountant as to how to best structure a sale to get the best tax benefits. I have shown several accountants a legal method for saving tens of thousands of dollars that they were not aware of, savings which were much more than my fee.

  3. Brokers can help sellers avoid lawsuits. Knowing what has resulted in lawsuits in the past gives brokers insights that they can share with sellers’ attorneys and key language that will prevent legal losses from frivolous actions.

  4. Brokers protect your confidentiality. They can provide and explain volumes of financial and other sensitive information to prospects who don’t know your identity. Only when qualified prospects understand and agree to terms and sign a confidentiality agreement would your identity be revealed.

  5. Brokers can help make you money. Instead of spending weeks of effort in doing a task you probably have no experience or expertise in, brokers can handle the process while you treat patients and make money.

  6. Dentist having a discussion over paperwork

  7. Brokers help prospects understand the facts of the deal. Buyers cannot look at a tax return and see what is really happening. We know your tax return was designed for one purpose – to compute the tax you owe – and not to show what a practice net income actually is. Without this understanding, many practices may be overlooked or purchased far below market value.

  8. Brokers know where the cash is and how to get a practice financed. We know the lenders personally and the best matches for practices and lenders. We work with lenders to get full financing quickly and help find the best rates for buyers and don’t waste time and effort where loans don’t get made.

  9. Brokers provide the maximum market exposure for your sale. The more prospects there are, the more likely you are to get your asking price. Through proprietary websites and the many venues that brokers have developed, your practice will be discovered by the most prospects possible.

  10. Brokers bring legitimacy to your sale. Buyers can discern that brokers inspect, value, and investigate a practice thoroughly before bringing it to market. We show owners how to increase their practice marketability, value, and financeability. It is the difference between buying a certified used car from a dealer versus a used car in someone’s driveway on a dark night. This added credibility gives buyers the confidence to decide to buy and to pay a fair price.

  11. Brokers get it done. I listed a practice for a seller who had tried unsuccessfully for two years to sell his practice. In three weeks, I had a full-price offer, and it quickly sold. The seller told me that he made more from the sale, even after paying my commission, than he would have by selling it himself. Then the buyer told me that the seller offered the practice to him a year earlier at a lower price but that he didn’t see that it was worth it. But through my explanation of the cash flow, the risk assessment and other factors he hadn’t thought about, the buyer decided it was worth the higher price.

Before you decide to sell by owner, remember the money, time, security and expertise that brokers bring to your sale.

Earl M. Douglas, DDS is the founder of ADS South and is a founding member of ADS Practice Transitions

Bar chart showing growth

The pandemic’s impact on the dental industry and business as a whole has been severe, but it has revealed some unexpected opportunities for many dental practices. You’re most likely well into the recovery of your practice because of one simple truth…people need dental care. That fortunate fact means your profits, while taking a hit in 2020, are on track for a rebound in 2021. So, what does this mean for dentists thinking about whether or not it’s time to sell their practice? It means now may be the time you’ve been waiting for, especially if transitioning has been on your mind.

Dentist holding up a chartThe pandemic was a trial by fire. But, many practices emerged from it with a greater potential for profitability. For others, the pre-pandemic trend within the industry of consolidation, plus the burden of reduced revenue and increased overhead expenses due to the pandemic, has them looking into the possibility of cashing out and selling their practice.

As a result, the pandemic has encouraged, if not created, opportunities for both buying and selling a practice. A recent article in Dentistry Today explains why dental practices are viewed as a valuable opportunity.

“…Investors consider dentistry a “recession-proof” business for good reason. It’s not possible to defer dental services forever.”

Dentist having a conversation with a patientPeople need dental care and that means there will always be a demand for dental practices. The pandemic only made that fact painfully obvious and in doing so, created a post-pandemic opportunity for sellers.

For more insight into whether now is the right time for you to buy or sell a practice, contact an ADS Transitions broker today. From valuations to successful transitions, they are ready to discuss how you can benefit the most in your current situation in order to achieve your end goals.

Stay, Grow, or Go Circles

Life is like a record album for those who remember what that actually is. It spins around and around, and once it gets to the end, it starts back at the beginning. Like the 70’s Rock Band, The Clash simply put it in the 1982 top 40 hit, “Should I Stay, or Should I Go”? The lyrics to the song could be how you see yourself in your practice. A lot of give and take and one day it is fine and the next it’s not. The business of Dentistry is very cyclical and almost everything we have experienced in the past 40 years has presented itself previously in some form or fashion. We always prevail, but do we have the time and energy left to do it again.
Man playing electric guitar

Do I stay? Keep everything as is and hope that the current pandemic is in the past. Will the new administration have my best interest in mind? Is my retirement plan fully funded and protected? Do I have the necessary resources available to make some modest investments into my business to maintain my year-over-year production and collections? These are just a few questions that you should be asking yourself.

Over this past year, due to Covid rules and regulations, offices were forced to clean up. For some, this was a bigger undertaking than others. Decades of clutter, dust and grime made it to the dumpster. Some offices got fresh paint, flooring, and some new equipment. Going to the office for some became a bit more exciting now that the office was feeling fresh.

Do I grow? In addition to the above, maybe you hire an associate if your practice can support one. Expand the facility if possible. Acquire an additional location. Build a new office and relocate the current office into that facility.

Now is a great time to take a deep dive into your numbers. Most practices monitor production, collection, new patients, and the accounts receivable. What is your practice mix? Most general dentists perform around 90 unique clinical procedures. The more procedures you offer, the less dependent you become on new patients. What about your insurance plans and fee schedules? Are you taking advantage of alternative patient financing? Are you coding correctly?

Take advantage of the current lending rates. Interest rates are currently at an all-time low. A ten-year loan for $100,000 at a 4% interest rate is only $1,013 per month. Depending on what you utilize the proceeds for, there can be some significant tax benefits as well.

Do I go? If you’ve been saying 5 more years for several years, and just when things go bad, they soon start to recover, and then they go bad again. There will always be something around the corner. As you and your practice age, the profitability, marketability and transition ability all slide up and down.

Chair in a dental office

Keep in mind that a transition typically takes up to a year to complete. The location may greatly affect that timeline and if you are a specialist or if you do a good percentage of specialty procedures, that may not only affect the timeline but also the market value.

Before you choose any path above, you should consult with one of our ADS Dental Transition Brokers. With the experience and expertise we have from coast to coast, you’ll be well informed and advised to make that very important decision.

Doug Sellan is a transitions consultant with PMA Practice Transitions and a member of ADS. He began his commercial banking career in 1987 and has over 30 years of experience in the healthcare industry.

Three dentists training in a classroom

Using your practice as a Dental Assisting School

The U.S. Bureau of Labor projects that employment of dental assistants will “grow 25% from 2012 to 2022.”1 You’ve probably already witnessed the growth and demand for quality-trained dental assistants. But have you ever considered how you could utilize your practice as a training facility?

Depending on the actual physical size of your practice, you may have an additional income opportunity staring you in the face. Imagine using your facilities after hours, one day a week over 10 to 13 weeks to train potential dental assistants? For many dental professionals, it’s an easy way to generate more income from their dental practice.

Once again, if you physically have a large enough practice, opening your own dental assistant training program makes a lot of sense. That’s because your dental facility probably already has a lot of what is needed to train dental assistants. And, perhaps best of all, you don’t even need to be there. With the right program materials, your experienced hygienist or dental assistant can teach the class. In addition, depending on the accreditation of the program you use to start a dental assistant training school, you, your faculty and your students may be eligible to receive CE credits for your efforts.

Obviously, starting a training program requires training materials, curriculums, and more. Fortunately, a variety of resources exist to help dental practices quickly get up to speed in offering dental assistant training. If you’re interested in learning more, a great place to start is an article in Dentistry iQ.

Starting your own dental assisting school can be a viable way to utilize space and equipment you already have, in a way that doesn’t detract from your current practice while generating more income for your overall bottom line. It can be a smart and rewarding move that helps satisfy a need for quality-trained dental assistants.

Reference:
1U.S. Bureau of Labor Statistics, Occupational Outlook Handbook

Empty dental chair with other equipmentThe classic definition of a dental practice transition is when a doctor sells all or part of their practice to another dentist. The seller either retires shortly after, or phases themselves out over a period of time. Other names to describe a practice transition include: buy-out, associate buy-in, partnership, or practice sale. But, the transition that is the best deal in dentistry is the practice merger.

Just like a traditional transition, the merger can be structured in many different ways. Two of the most common are:

  1. It can be an outright sale, where the seller retires immediately.
  2. It can be a phase-out, where the seller merges their practice into the buyer’s and works for a period of time as the associate. This can be as short as a few weeks, or it can be a long phase-out over years.

So why would a buyer want to purchase a merger? Big business figured this out long ago: The quickest way to grow a business with the least amount of risk is through acquisitions.

You have heard the term “mergers and acquisitions.” Bank of America, Chase, and JP Morgan didn’t become massive banks through organic growth, they did it by buying and merging other banks. There are two main economic theories for this operation. First, there are synergies that are gained when you combine two similar operations. Redundant expenses and staff can be eliminated. The result is two gross incomes with one overhead.

Second, the immediate increase in number of patients.

Let’s take a look…

Buyer’s Practice – 1800 active patients   Seller’s Practice – 800 active patients
Gross Income 600,000   Gross Income 384,039
Wages 180,000 Wages 136,135
Taxes 10,415 Taxes 13,518
Rent 36,000 Rent 24,000
Legal & Professional 3,000 Legal & Professional 1,935
Insurance 4,500 Insurance 3,208
Office Expense 15,000 Office Expense 2,412
Repairs 4,500 Repairs 2,169
Utilities 12,000 Utilities 5,269
Telephone 2,400 Telephone 2,819
Dental Supplies 36,000 Dental Supplies 24,000
Labs 30,000 Labs 29,051
Bank Charges 5,000 Bank Charges 3,758
Marketing 15,000 Marketing 3,000
Dues & Subscriptions 1,500 Dues & Subscriptions 1,500
Total Expenses 355,312 Total Expenses 252,774
Net Income 224,685 Net Income 131,265
Overhead 59% Overhead 65%

When a merger happens, all of the highlighted areas of the purchased practice go away. When you merge the practice into the buyer’s practice, you are only paying one rent, not two. You are only paying one accountant, not two. And so on.

Buyer’s Practice – 1800 active patients   Seller’s Practice – 2600 active patients
Gross Income 600,000   Gross Income 984,039
Wages 180,000 Wages 225,000
Taxes 10,415 Taxes 11,502
Rent 36,000 Rent 36,000
Legal & Professional 3,000 Legal & Professional 3,000
Insurance 4,500 Insurance 4,500
Office Expense 15,000 Office Expense 15,000
Repairs 4,500 Repairs 4,500
Utilities 12,000 Utilities 12,000
Telephone 2,400 Telephone 2,400
Dental Supplies 36,000 Dental Supplies 59,000
Labs 30,000 Labs 59,201
Bank Charges 5,000 Bank Charges 8,000
Marketing 15,000 Marketing 0
Dues & Subscriptions 1,500 Dues & Subscriptions 1,500
Total Expenses 355,312 Total Expenses 458,850
Net Income 224,685 Net Income 525,189
Overhead 59% Debit Service on the loan 15,776
Net Income 509,413
Overhead 52%

When you look at the before and after of the combined practice, it’s like magic! The buyer picked up an additional 800 patients overnight. If you’re getting 10 new patients a month at your practice, it would take almost seven years to reach 800 new patients.

Chart showing 800 patient increaseWe have completed many “merger” deals and the buyers almost unanimously tell us they were successful. A few patients that once lived in the neighborhood and now travel, may take this opportunity to find a dentist closer, but the vast majority of patients transferred to the new office. As the “new” dentist, you have the opportunity to make a great impression on new patients and give them a good experience that will keep them as patients.

Once a dentist does one of these transitions, it’s not uncommon for them to call us a year later to inquire about other nearby deals and be put at the top of the list to call if any become available.

There is no better feeling, knowing that a transition was a win-win for all involved.

James Ackerman is a dental transitions broker with ADS Midwest. He can be reached at jim@adsmidwest.com or (314) 449-4517.

Dentist working at a computerHello Again,

Our last article was dedicated to the basics of tax considerations in the practice transition process. As a quick refresher, the total sale price of a dental practice is typically allocated in some part to goodwill, equipment, and supplies. Each of which carries with it its own tax consequences for both the buyer and the seller. In short, the seller will want to mitigate taxes on the sale proceeds they just received, whereas the buyer will want the shortest write-off possible for the business and property they just acquired.

While the above may seem obvious, occasionally some opportunities present themselves for even more creative tax planning and minimizing strategies.

Timing of Transition

A seller may want to pre-plan their transition to happen on January 1st of a new year (or first business day of the year). This will push any income (whether ordinary or capital gain) into a tax year with no other income. For example, a practice sold by a married owner that will result in $450,000 in capital gains and $75,000 in ordinary income from the sale, plus a $300,000 business profit in the same year would result in an approximate federal tax bill of $156,775 (19% effective tax rate). That same transition pushed to the following year without business income would result in a total federal tax bill of $123,049 between the two tax years (14.9% effective tax rate). This is an easy and straight-forward tax minimization strategy.

Use Sale Proceeds to Fund Retirement Plans

If a seller is not planning to execute your transition on the first of the year, he or she may be well served to use some of the sale proceeds to maximize funding of the practice retirement plan. This works especially well if you use a Cash Balance plan in conjunction with your practice 401(k)/Profit Sharing plan. A 401(k)/Profit Sharing plan will allow an owner age 50+ to deposit $64,500 into the plan pre-tax. If using a Cash Balance plan, that amount can easily be in excess of $150,000. Since deposits into these plans don’t have to be made until tax-filing, the cash from the sale of the practice can be used to make the deposits and result in considerable tax savings. This strategy should be formulated in the years leading up to a practice transition to best allow for any plan implementation or necessary amendments.

Receive Sales Price Over Time

While some owner-doctors seek to get the entirety of their sales price upfront, not every seller needs or wants this. Consider a seller that is planning on staying with the practice after the sale as an associate for the new owner. If continuing to work, they may not need the sales proceeds to live on, so they can afford to take some or all of the sale price over time. In this situation, the buyer and seller have abundant flexibility in crafting deal terms.

Notebook titled tax planning on a deskOne option available in a transition of this nature would be for the seller to finance the transaction, all or in-part. In this case, the buyer would make payments directly to the seller (instead of to a bank) over a specified term and at a specified interest rate. While this method does carry more risk to the seller than traditional bank financing, if the seller feels that the buyer is credit-worthy and charges a commensurate interest rate, it would allow the seller to stretch the tax on the sale of the business over time. In accounting nomenclature, this is referred to as an “Installment Sale.” In this case, the seller pays tax on purchase over time (some at capital gain rates, and some at ordinary income rates). Since an installment sale is a loan, it will carry interest which the seller will be taxed on at ordinary income rates.

Given the level of trust the seller must have in the buyer, it shouldn’t come as a surprise that a method like this is typically used when the buyer and seller have an exceptionally close relationship, like a son or daughter buying the practice from a parent.

Associating After the Sale

Another potential option for a seller that is planning on working after the sale would be to balance the practice sale price with the associate’s salary. In other words, a seller is sometimes willing to take less for the practice up-front, if they will receive a generous salary as an associate in subsequent years. Conceptually, a practice listed for sale with an $800,000 price may actually sell for $600,000 if the seller will be paid $200,000 in salary over the next 2 years. It’s worth noting that this strategy would likely require a departure from the traditional percentage of production or collection compensation model in favor of a more conventional salary (fixed amount per year). Buyers may find the option appealing, as the salary would be immediately expensed (written off) in the year(s) paid. Even though the salary would be taxable to the associate (seller) at ordinary tax rates, that tax would be spread over the years it is paid. Furthermore, it allows for a point of negotiation if it is important to the seller to be able to work after the transition.

Taking this strategy one step further, if the new practice owner is agreeable to it, the associate may be paid as a sub-contractor. Instead of receiving compensation in the form of wages, the new owner will pay compensation in the form of fees to the seller (or their entity). Doing so will allow the seller to continue to deduct professional expenses just as they did when they owned the business. Additionally, they can couple this strategy with the Retirement Plan Funding tactic mentioned above to further offset income tax.

These are just a few ideas for strategies than can help manage taxes in a dental practice transition. The points listed above are the not applicable to all practice transitions and both a buyer and seller should consult their respective Dental CPAs to make sure any transition strategy serves their objectives. With that said, hopefully it’s clear by now that the more proactive and communicative both parties can be leading up to the formal transition, the more options for tax strategy they will have.

As a parting comment, I must caution all buyers and sellers to beware of the practice brokers that seek to apply a “cookie cutter” approach to deal structure. Which is to say they know one way to structure a deal that leaves little, to any room for creativity or flexibility. This is why it’s imperative to work with seasoned professionals, like ADS Dental Transition member firms. Collectively, we have decades of experience crafting successful practice transitions for both the buyers and sellers we have represented.

Ted Schumann, II, MBA, MSF, CFP®, AIF®
John Looby CPA – The DBS Companies

“Goldman Sachs raised its forecast for 2021 US gross-domestic product growth to 6.8% from 6.6%” 1
“Small Businesses Finally See Positive Outlook for Economic Recovery in 2021” 2
“The Economy Is Improving Faster Than Expected, the U.S. Budget Office Says” 3
U.S. Economy Is Expected to Reach Pre-Pandemic Peak by Mid-2021 4

Financing dental practices
We had the best economy with the lowest unemployment OF ALL TIME prior to this virus. Most economists are confident that the stimulus package will result in several years of better-than-average growth in the US economy.
I personally have had private conversations with DSO/corporate executives that are
bullish on dental revenues for 2021. Most were able to weather the pandemic storm
through PPP loans and managing their expenses. Sometimes that meant putting their
associate dentists on furlough. When all is said and done, I believe long-standing
practice owners will emerge from this pandemic better off than any associate dentist.

Dentistry has always been one of the best small businesses during times of economic downturn and especially during the times when a slow economy bounces back. Fortunately, most of the revenue “lost” during the pandemic was not really lost, but deferred. Except for perhaps hygiene revenue, all deferred dental treatment will need to be done, and unfortunately for many patients, some of that deferred treatment might lead to more extensive treatment. We all hope our favorite restaurants will re-open to full scale, but unfortunately all their lost revenue is truly lost! Not so, for dentists!

CURRENT STATE OF THE UNION FOR PRACTICE TRANSITIONS

The mandatory shutdowns have forced many businesses to rethink their current business models, as they have discovered that their employees working from home can be more efficient than the costs of renting large office space. Obviously, dentistry cannot be done remotely, but the shutdowns have triggered an event that many of us have been expecting for several years.

1983 (the year this author graduated from dental school) was the year that the baby boomer generation produced the most dental school graduates of all time. Baby boomers are those that were born between 1946 and 1964. Many of the older boomers delayed their retirement after the 2009 economic downturn. The pandemic, combined with record stock market numbers, has spurred all boomers to consider retirement. I am personally seeing a 30% increase in the number of listings in my inventory, and this number is 50% higher than the 2010 levels of practices on the market. The basic supply/demand economic balance is getting weighted on the supply side, which historically will pressure pricing downward.

Since the mid-2000s, many dental schools have opened up across the country. And, since 2017, we are producing more dentists than the number that graduated in 1983. While that sounds encouraging as far as numbers go, the demand for dental practices has waned since the 2009 economic downturn for many reasons:

  1. The current average debt of dental graduates is now between $400K and $500K and they are fearful of going into more debt.
  2. The millennial mindset of these graduates is totally different than the boomer mindset. Boomers went into dentistry to own their own practices and be their own boss. Millennials generally are more interested in “quality of life issues,” translated as they do not necessarily want the responsibility of owning one’s practice, making the decisions that are required, and carrying the worries that come with ownership. Because of this, Corporate dentistry does not have a problem finding associate dentists.
  3. The percentage of female graduates are now about 50%. My wife and daughter are both dentists, so this is not a negative comment on female dentists, but many female dentists rightfully put having a family above the perceived, all-encompassing stress of owning a practice. In 1983, females accounted for only 10% of the dental school class. Corporate dentistry did not exist, but those women dentists found a way to own practices and raise families.

Financing dental practices

TAKEAWAYS FOR SELLERS

  1. Both sides of the supply/demand scale are trending toward lower practice valuations. Even in the best of times, your practice sale only generates 1.5 to 2 times your annual take-home profit. Your practice sale never should have been the largest part of your retirement plan, but if it was, working an extra year or two results in the same financial gain. The sooner you contact your accountant or tax planning professional, the better.
  2. Every practice, large or small, has value! I am not trying to be negative in this article, I am just trying to be a realist. Large practices are now easier to sell than smaller practices, mostly due to the large school debts of the new graduates. If a dentist is the main breadwinner of their family, they probably need to buy a practice that collects over $700K a year to pay for their family and school expenses. Smaller practices are great for a dentist that is not the primary breadwinner, or a graduate that does not have school debt. Smaller practice owners should consider short-term leases as a buyer may want to merge the smaller practice into another to meet the new debt and cash flow needs.
  3. Location, Location, Location: There are some locations that will demand a premium, no matter what the supply/demand scale dictates. There are also some locations that previously sold quickly, but now they do not. Your local broker should be able to tell you what the current demand is in your area. Please note, that even a 5-mile difference in any area might generate a huge difference in demand.
  4. Be Patient! Most buyers now are still expecting some type of “COVID-19 discount.” In fact, there were many practitioners that “threw in the towel” during the shutdown and sold their practices at huge discounts. There is no reason to do that now, but assuming you went back to work months ago, you are now still in a “prove it” mode to show buyers, lenders, and buyer’s accountants that your practice is back to normal. Frustrated, furloughed associates are entering the transition market and patients are returning to dental practices. I believe the economic forecasts cited at the beginning of this article will be true for dentistry by mid-2021, and that dentistry will surpass every other business as it has always done in a recovery. Increased revenues, combined with more demand, should help practice values later this year.
  5. Brokers may be more necessary now than ever: Navigating these new times and exposing your practice to the greatest number of potential buyers is what we do here at ADS Transitions. We are a consortium of independently owned brokerage companies that can expose your practice through a nationwide portal and locally through our own website and portal. Your practice is still one of your most treasured assets. Transferring this asset is infinitely more difficult than selling your home, and most of you would never try to sell your home without an agent who gives your home exposure in your market. Saving a few percentage points on a commission with a non-local broker, or one that does not have exposure in your market is pure folly. Even hiring the best broker cannot guarantee finding the perfect buyer in short order, but not hiring the best can certainly lessen your success by a great amount.
  6. Financing dental practices

    TAKEAWAYS FOR BUYERS

    Associates will take home less than owners for the same amount of production, whether the economy is strong or weak. Large practices that employ associate dentists, do so for the profit potential. There is nothing wrong with this, but it should be common sense that a productive associate is making money for the “house” and would be able to retire, make debt payments, and feed their family better if they took home that extra profit.

    1. The best way to pay off debt is to own your own practice. As soon as you are producing $2,000 to $3,000 a day on a normal fee schedule, you should be able to take home almost twice the amount of money as an owner, rather than as an associate! Practice debt should not be looked at the same as dental school debt or other debts. It should be looked at as a “return on investment.”
    2. 100% financing plus working capital is available at 4% or less. At these rates, the smart “return on investment” is to buy a practice that covers your financial needs, as the greater profits translate into the best return on investment. Of course, the greater the profits, the more the practice will cost, but the low interest rates will always show that your take-home amount after debt service will be more with the larger practice.
    3. Don’t get caught up in the “price” of the practice. Your “million-dollar question” in your due diligence is “how much do I think I can produce with the patient base in this practice.” Your due diligence should reveal whether you may be able to increase revenues, or perhaps, won’t even be able to meet what the seller produced. We all have different skill sets. No matter what your “team of advisors” might tell you, only you know how you compare to any dentist you are replacing. Your debt service differential is nominal compared to your own skill set with any patient base, meaning the price is nominal compared to what you estimate you could produce in a practice. Based on your skill sets compared to the seller’s skill sets, you will find practices that you might double when you take over, compared to practices you might be lucky to produce half of what the seller did. Guess what, they will both be priced at market metrics for gross receipts and cash flow for the CURRENT doctor’s skill sets! Getting a “steal” on a practice where you cannot replicate the seller’s production, for whatever reason, could be a disaster and “over-paying” for a practice where you increase revenues could be the real steal, even in a practice where the buyer might have to take the Delta fee reduction.
    4. Scratch starts are crazy. Building out and equipping a new, two-operatory practice now costs around $500K. There are no patients to start with, only bills! For $500K, you can buy a practice that already throws off several hundred thousand or more as a profit, not just gross receipts! Even if you are debt-free, don’t really need the income, and find a “facility only,” normally you will most likely have to spend money on upgrades and marketing to get to the size practice you desire. It still makes more sense to buy many of those smaller practices that an old boomer is ready to let go of, knowing you will have to upgrade much of the office. Most older docs ready to retire with smaller-producing offices are way underperforming on their current patient base. These are usually diamonds in the rough, but again, only your own personal due diligence can determine this.

    CONCLUSION:

    Sellers: Be patient as the best is yet to come this year, even with the uptick in supply.
    Buyers: You have more choices now at the lowest interest rates in the history of the modern economy. Choose wisely, employ good staff and you will eventually pay off your debts, live more comfortably and be able to afford more time away from work, as your staff should be able to help relieve you of the burden of ownership headaches.

    Dr. Timothy G. Giroux, DDS started his own dental practice in 1983 and has used that experience to help buyers and sellers. Dr. Giroux is a part of Western Practice Sales.

    Footnotes:

    1. Market Insider, Feb 9th, 2021. Author Shalini Nagarajan
    2. Business Insider, Feb 9th, 2021. Press Release
    3. New York Times, Feb 1st, 2021. Author Jim Tankersley
    4. Wall Street Journal, Feb 1st. Author Kate Davidson

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.