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!

Close up of two people working on documentsBuying or selling a dental practice is a significant undertaking. It can be overwhelming for most doctors because they only buy or sell a practice once in their career. As a seller, your experience from when you purchased your practice will be significantly different from what a buyer experiences today, whether you purchased your practice five, 10, or 30 years ago. Conversely, buyers today face a myriad of challenges in the post-COVID 19 market. This article will look at what an ADS Transitions consultant brings to the table during a dental transition from the perspective of a seller looking to retire and a buyer purchasing their first practice.

When the time comes to sell your practice, you will want to ensure that you have a team in place to support you through every step of the process. Ideally, you will have consulted a financial planner a few years prior to ensure that you are financially prepared to retire, and you have prepared mentally to step away from owning a practice. You should also have a plan to remain productive and busy in retirement. Once you have reached this point, you should be looking to expand your team. This is where an ADS Transitions consultant can assist you.

Polygon with lines pointing out to different kinds of informationThe ADS consultant can be considered the quarterback of your team throughout the sale of your practice. When you begin the process, the consultant will review all the steps involved. Your team should include an accountant and lawyer who ideally will have prior experience in the dental industry. Your ADS consultant can provide recommendations as well, and will also let you know at what stages to get other team members involved.

As you work through the process, the ADS consultant will initially collect a significant amount of information about your practice and ask many clarifying questions. He or she will recast your financials to determine your practice profitability, and then work with you to determine an appropriate selling price, factoring in several variables relevant to your local market. The next step is to market the practice on the ADS Transitions website, as well as the consultant’s local channels and network. As prospective buyers express interest, the consultant will arrange appointments for the buyer to meet with you and tour your practice, with the goal of eventually negotiating an offer. Once an offer has been agreed upon by the seller and buyer, the consultant will work with the seller’s counsel to review the Agreement of Sale and help keep the process moving efficiently toward a closing.

Other Ways a Consultant Helps You

An ADS Transitions consultant can help a buyer in various ways. If a prospective buyer is interested in an ADS listing, the listing consultant can provide additional information, arrange an office visit, and answer additional questions the buyer might have. Alternatively, if the buyer is interested in a practice listed by a non-ADS consultant, they can act in the role of a consultant for the buyer, reviewing information about the practice and offering guidance. Also, ADS consultants can provide financing options and contacts to lenders that specialize in dental industry financing.

Document with Contract written on itOnce an offer is made and accepted, contracts are drawn up for the practice and real estate (if involved), and as closing approaches. There are many final steps that the consultant can assist with. Patients will need to be informed after the closing takes place, and letter templates can be provided that can be customized specifically for the buyer and seller. Effectively communicating with staff is another critical area that the consultant can assist with later in the process. And, from the buyer’s side, the consultant can provide resources to help with credentialing, which can be a very time-consuming process.

There are many valuable services that an ADS Transitions consultant can bring to a transaction for both a seller and a buyer. To find out more, visit our dental broker directory to locate your local consultant and schedule an appointment to discuss your situation further.

Kevin Cooper, MBA, is a practice broker at American Practice Consultants and a member of ADS Transitions.

Information on Facebook Live event on June 25th, 2020

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Dentist wearing a medical mask and glovesI’m sure we have all read a great deal of expert speculation about the future outcomes of the COVID-19 pandemic. While a variety of informed opinions have been presented, I think it’s unlikely that anyone knows what will happen as this year unfolds, so I’ll spare you any further conjecture.

I will, however, share the hard facts of what is going to evolve from this crisis and explain the opportunities and the failures that will occur. This is not conjecture, but rather the inevitable consequences that are coming our way, and each of us will be able to identify ourselves in an outcome category. I will also provide a successful strategy to implement for each category, to help emerge from this crisis in the best possible condition.

Here is what is going to happen. There will be three major financial outcomes from the pandemic and every dentist will fall into one of them. A great way to illustrate the three outcomes is to think back to the M*A*S*H TV show. When multiple patients arrived at the M*A*S*H hospital, the first thing they did was to triage the casualties. In dentistry, the three triage groups that will be emerging from this crisis are as follows:

A. Practices that are likely to survive, regardless of what support they receive

B. Practices that are unlikely to survive, regardless of what support they receive

C. Practices in need of immediate help that may make a positive difference in outcome

Infographic on the 3 types of post COVID-19 dental practicesGroup A practices will survive the pandemic with little or no damage, and they will continue to operate pretty much as they had before the pandemic. No special help is indicated for this group, as it will only need some normal management skills to continue to prosper. If your post-pandemic practice revenues are within 10% of pre-pandemic levels, you would be in Group A. Just work smart and stay on top of the business element and you will be in good shape.

Group B practices are seriously wounded and are not expected to recover, meaning they will not be able to return to a pre-pandemic cash flow. Their practice cash flow will be insufficient to provide any net income and may not be sufficient to even cover overhead expenses. In a medical situation, these patients would receive morphine to relieve their pain, but medical treatment would not be given to them because it would not help. Giving treatment to Group B victims would only result in the loss of more Group C victims that would have been saved had they received that treatment.

If your practice revenues have dropped to the point that you are not able to take a salary of at least 35% of your production, you may be in Group B. If you are unable to cover overhead expenses, you are definitely in Group B. Keep on reading through to understand a simple but innovative approach for selling your Group B practice that could not be accomplished any other way.

Empty dental office with dental chairGroup C practices represent the wounded practices that could be cured with an appropriate intervention. These practices are the up-to-date, technologically equipped offices that need no capital expenditures to move forward. They are modern, attractive offices with an excellent well-trained, in-place support staff and are skilled in the business and financial side of their practices. They have everything they need to be quite successful with the sole exception of enough patients. If your practice revenues have decreased by 20% to 60%, and your practice meets the above criteria for equipment, staff, and technology, and you are still able to cover overhead expenses and pay yourself some amount of salary, your practice is probably recoverable.

Now, to be certain, there is only one intervention that I can recommend to revive Group C practices. Just as epinephrine is the only recommended treatment for anaphylactic shock, the merger purchase is the pathognomonic cure for Group C practices. Of course, there are other treatments for Group C practices, such as marketing, but that takes too long and the patient could die before the benefits of marketing could work.

So, why am I so high on mergers? Besides being the best singular cure for Group C practice weaknesses, they also provide a means for Group B practices to recover some value for the owner, rather than just closing the doors.

Group B practices only have value if properly packaged and marketed to the appropriate buyer, which is the Group C practice owner. There is no other feasible buyer. It is also possible for the merger purchaser to allow the seller to stay and work while earning income after the sale, and still allow the purchaser to make a fair profit after paying all of the extra expenses and debt service.

How does this merger purchase achieve the results we need? The process is quite simple. The Group C practices simply buy Group B practices and absorb the patients of the acquired practice into the purchaser’s existing location. The key to the success of this is bringing the patients into the purchaser’s office and closing the seller’s location. The acquisition of satellite offices is not recommended since that strategy will incur extra fixed and variable expenses and additional stress of running two offices. The merger is the only simple, safe and effective solution.

The merger purchase is an instant solution for the Group C buyers, adding income from the first day. There is no lag in increasing revenues as there is in marketing, and the results are much more profitable, certain and predictable.

Close up of paperwork being done by two peopleMergers are incredibly powerful cash flow generators, even with the lowest producing practices, because the only extra expenses incurred by the purchaser are the debt service for the acquisition loan and the acquired practice variable expenses, primarily lab, supplies and a slight, if any, salary increase. The extra expenses are no more than 30% of the gross and the debt service is about 10% or less of the gross, so the merger purchaser will realize a net of ~60% of the acquired practice revenues.

The merger results I’ve observed have been quite surprising. It’s not uncommon for a merger buyer to double the revenues of the acquired practice. Adding endo and implants alone will significantly increase the practice.

One of the most impressive traits of the merger purchase is the low risk. If not one single, or even married, patient were to come to the merger buyer’s practice, the only expense to the purchaser would be the monthly note payment, which is about 10% of the seller’s revenues. Therefore, if the merger buyer lost 90% of the seller’s income, he would still break even. I’ve yet to see this happen in 38 years of observing mergers. I tell merger purchasers that this purchase is safer than their drive home.

Another huge advantage of the merger purchase is that the seller’s hygienist will pay the payments for you. The seller’s hygiene profit, that is hygiene income minus the hygiene salaries, will invariably, more than pay the monthly debt service. Another donor to the loan payment is Uncle Sam. He will allow you to deduct and depreciate the entire price of the acquired practice, resulting in real dollar tax savings that amount to taking one third off of the price.

If you’re in the triage Group C, give some strong consideration to the very best strategy to restore your practice’s lost revenues. It’s instant, effective and safe.

If you’re in Group B and don’t see how your practice can recover, call us at ADS Transitions to enlist our expert support in salvaging a fair value for your practice. We know how to analyze, value, package and market your practice for the best results. With ADS Transitions on your side, you can survive this time in history in the best way possible.

Earl Douglas with information on Facebook Live event on June 25th, 2020Earl M. Douglas, DDS, MBA, BVAL, began his transition career in 1982 after selling his own dental practice. Currently, Dr. Douglas’ company, ADS South, LLC, provides consulting services in the Southeast, from Louisiana to Washington, D.C. Dr. Douglas founded ADS Transitions in 1996 and served as the organization’s founding president. Dr. Douglas is also a contributing author for Dental Economics and he has presented numerous seminars for Dental Economics and state dental associations.

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One thing for certain in our industry, nobody could have foreseen the impact and chaos that COVID-19 caused all of us. But, with that said, and as the dust of the pandemic’s initial assault settles, a lot of practice owners are coming out of their quarantines with questions about what the market is for those looking to buy or sell a dental practice.

To help, all of us at ADS® Dental Transitions™ have put together five common questions a lot of dentists have on their minds about practice value. From valuation to financing to questions about selling a practice at this time, you may be surprised by what the market is doing and how you can take advantage of the current situation.

Exterior view of a closed dental office

Q: How does this pandemic or any other major societal crisis affect the value of my practice, especially if I’m looking to sell?

A: There is one indisputable fact to remember: people will always have teeth and need dental care. I graduated from dental school in 1983. More dentists graduated that year than any previous year. Interest rates were 17% at the time and our instructors felt we were graduating during one of the worst times ever. Many instructors feared that most of us would go bankrupt within the next five years. I set up practice anyway in 1986 with an incredible low interest loan of 12%. I suffered the stock market crash of 1987, the AIDS crisis and OSHA freak-out of 1990 and the last stock market crash of 2008. Hindsight is great, but the actual results of the past 35 years are:

1. I believe my classmates and I practiced through some of the best times ever to be a dentist.
2. Dentistry proved, as always, to be one of the best recession-proof businesses to be in, as most downturns normally result in a 5% or so percentage drop.
3. While the debt of newer graduates is truly greater than my debt was after adjusting for inflation, the current interest rates at less than 4% help make up for that in comparison to my era.

With that said, I believe that dentistry will still remain a profession that, while not totally recession-proof, will persevere and remain one of the better health care professions to aspire to. In the long run, the current crisis will not be any different than the major three events mentioned above. In the immediate short run, of course, there will be some temporary “turmoil” as uncertainty always creates havoc in any market. I have experienced several calls from clients that enjoyed their “temporary retirement” the past eight weeks, and requested me to lower their asking prices to help facilitate that. I don’t believe that this will cause any long-term negative valuation pressures, as this will wash itself out in 45 days or so. As stated above, while this crisis might precipitate something similar to the past three crises, people will always have teeth and need dental care. Obviously, the sooner a practice can show that it is viable and even “close” to producing the same numbers as pre-COVID, the better.

Q: What’s the market for dental practices look like? Are buyers out there right now?

A: Yes, many associates have now realized that job security might be best secured with ownership. My last white paper went over all the reasons that a reasonably producing associate will always make more money as an owner than as an associate. Large practices and corporate dentistry will always be with us, and they exist as they are making a profit off their associates. The best way to retire student debt is to buy a practice once your skill sets and hand speed get developed, usually at least 12 to 24 months after you graduate from dental school. Experienced buyers that were around during the last crisis of 2008 know that whatever recession may occur now, if any, since the government seems willing to invest in the economy, will be temporary. Of course, they are going to ask for a “COVID discount” or some sort of “earn out” perhaps, but a profitable practice ALWAYS has value.

Dentist working on a patient while looking through magnifying device

Q: Has my absence from being open and practicing hurt my value? And, if so, how long will it take for my full value to recover?

A: Of course, 2020 will look awful for EVERY practice. While everybody understands that this is a temporary setback of the previous three crises, there is obvious uncertainty in the short run. Therefore, as stated above, the sooner a practice can show three or four months of near “pre-COVID” production, the better. Practices that throw off more profit will have fewer problems than those that don’t.

Q: Are banks willing to provide financing to buyers right now?

A: Yes, but as always, they do it on a case-by-case basis and take into account the practice profitability and the buyer’s skill sets, both clinical and managerial, and the buyer’s financial strength. Most do want to see at least several weeks of proof that the patients are returning.

Empty dentist chair in dentist office

Q: I’ve been thinking about selling my practice. Is now a good time to do it?

A: I do think that we are seeing more associates considering practice ownership after this crisis. No one knows just how long it will take for small businesses to rebound from the financial destruction of this lock-down. Many states are allowing their citizens to make informed choices on how to go about their lives. Some states believe that they should dictate those choices for the good of all. Depending on where you are and once routine dentistry is finally restored to your area, I believe you can put your practice on the market and make an “all-out” effort to get your production numbers close, or surpass the pre-COVID numbers. I believe that just a few months will suffice to be able to value a practice at its previous 2019 performance. I don’t think some trailing 12-month period starting in July will be necessary to show that once again, dentistry will prevail!

It is definitely a frantic and frustrating period we’re living through right now. But, as the old saying goes, “cooler heads will prevail.” I believe recovery from the COVID-19 crisis is not only possible for practices, but will occur quickly because, like I said before, people will always have teeth and need dental care.

If you have any additional questions about buying or selling a practice, the experts at ADS are ready to help.

Hand with glove disinfecting a dental officeThese are unprecedented times with dental offices closed for weeks and social distancing. Sadly, until 2020, social distancing was not a mainstream term. But here we are and social distancing is an everyday reality that permeates the news and our lives. What does this mean for your dental practice value going forward?

The reality is, very few practices are changing hands at this time. Who wants to take over a dental practice that cannot be open? Or, in the case of an endodontic office, even one that is open is most likely limited to emergencies. Surprisingly, there is a very small percentage of transitions that does make sense at this time. If you are interested in making aesthetic changes to your new practice purchase, this is a great time to do it. Or, perhaps you are adding a satellite and want to integrate the two offices together; the doctor and staff are available to work on the non-clinical aspects while social distancing, and this gives you an opportunity to have everything ready to go when your market opens up. Fortunately, for some of you, the COVID-19 closure time may already be passed and your practice has returned to normal. For the rest of you, hopefully this issue is coming to an end. So, what happens to the value of your practice?

Prior to COVID-19, the economy was thriving and sound. It was a time of economic boom and robust markets. While we cannot assume that while coming out of COVID-19, the economy will be as strong, the good news is that your practice value should not have decreased much, if at all. Yes, you will have a dip in collections during your closed period, but that should not reflect poorly, nor affect the value of your practice. Rather, we will refer to this closed time, and thus reduced collections, as an outlier to your practice.

The main consideration for practice value should be based on the cash flow of the practice. While your collections, and thus your cash flow, will obviously be affected during the COVID-19 closures, the anticipation is that the closures will be short term and your practice will be back to business as usual. The short-term practice closures associated with COVID-19 and the following outlier months should not reduce the value of your practice. Banks are aware of and understand that social distancing and short-term closures are the reason for decreased collections, and that it has nothing to do with your practice being less desirable than it was.

Sign that says social distancingIf COVID-19 does have a further negative impact on the economy, will your practice be worth less? What if we enter a recession? Is your practice worth less then? George Santayana said, “Those who cannot remember the past are condemned to repeat it.” With that in mind, let’s look at what happened to practice values during the 2009 recession. Back then, practices with healthy cash flows were actually more in demand than they were during times of economic prosperity. Due to the demand to find a quality practice to purchase in 2009-2010, practice values did not decrease during the 2009 recession. Associate jobs were hard to obtain during this recession, and many associates were let go as the practices simply didn’t have enough work for two or more dentists. Plus, dentists were more willing to consider practice opportunities outside of metropolitan areas, and practices in more remote areas were in demand. These additional factors kept practice values from decreasing, as many associates made the choice during this economic recession to purchase a practice and be in control of their own futures.

So, how should your practice value be calculated? A purchase price based heavily on cash flow should represent a fair number to both seller and purchaser. This should be the main consideration when calculating practice values. If you have an endodontic practice, there are additional items worth considering, including the age of your referrals. There are obviously other factors for an endodontic practice, general practices and, of course, other specialty practices, but cash flow should be the main consideration. During these COVID-19 months, cash flow will be disrupted, but the reality is that much dental work that is not being done at this time still needs to be performed. The expectation is that once the social distancing guidelines are relaxed and dentistry can open again, there will be an increased need for dental services.

Your practice value moving forward. Today: Office Closed, Cash Flow Down, Demand High. Near Future: Office Open, Cash Flow Up, Demand High.Many dentists throw around a percentage of collections to determine value. Yes, it’s a much easier calculation and anyone can do it, but it most likely doesn’t represent the value of your practice. If you are using an arbitrary percentage of collections, you are assuming that all practices are equal, or that your practice is average, which is likely not the case. This is a typical technique for practices that aren’t being managed properly, because the resulting price is likely higher than what the practice is worth. It is also a typical action for those unwilling to take the time to consult a specialist in practice valuations to figure out the true value of the practice.

As a purchaser, it would seem the important number to know is how much will be deposited in my bank account after purchasing the practice and paying the expenses. That number should be of much greater value and importance than a percentage rule of thumb that is arbitrarily calculated. The amount of money taken home after all expenses is the important figure. Does it matter what the percentage of collections is? Certainly, that number is not important in comparison to the money that will be profit.

Fortunately, the expectation is that during these uncertain times, dental practice values should not be impacted by COVID-19. And if our economy cannot recover as quickly as everyone would like, that should not have a negative impact on your dental practice either.

Hand with floating question marksCOVID-19 has all of us questioning how we move forward. Unfortunately, many will retreat into their safe zones when it comes to making a career choice or financial decision. From a strictly financial standing during times of economic prosperity or downturn, it is always better to own a practice than to be an associate in a practice. There are some small exceptions to this rule, and we will discuss those once we show why it’s “almost” always better to own a practice compared to being an associate.

First, it’s important to remember that we will get through this virus crisis. The expectation is that eventually everybody will get back to work. There will be government funding to bring manufacturing back to this country, so that we do not experience supply chain issues as we did during this crisis. We had the best economy with the lowest unemployment OF ALL TIME prior to this virus. With that in mind, there is no reason to believe that the economic pain will be long or protracted as with past economic crises. Even in those downturns, dentistry normally retracts less than most other sectors as EVERYBODY has teeth! This should not be a normal economic downturn as we had strong underlying fundamentals and we will bring back some manufacturing. Therefore, the seemingly “safe” course to not become an owner just assures less income at any stage of the economy. Associates will take home less than owners for the same amount of production, whether the economy is strong or week.

Large practices that employ associate dentists, do so for the profit potential. There is nothing wrong with this, but I don’t think that dentists who own dental practices understand just how much profit they make, compared to being paid a percentage of production. The following example is a true story of a friend of mine who sold to a large group and then worked for the practice for the standard two years to collect the total purchase price. It is a great example of why every associate should want to be an owner, because as you will see, this owner willfully turned himself into an associate without understanding the profit he left on the table.

Person working on finances with a calculatorMy friend’s practice collected about $1,000,000. The doctor’s true profit after adding back all the benefits he ran through the office was 37.5%, or $375,000. (I am from California, and that number would be good. In the Southeastern part of this country, that number might be as high as 50%, which means a buyer there could look for a practice doing around $750K and achieve the same profit!) The doctor’s hygiene department contributed the normal 25% of the collections to the practice. The large group that bought him out stipulated that the doctor had to stay on for two years and keep the numbers the same for those two years. They paid 24% of collections and agreed to go as high as 28% if the doctor hit his goals.

So, for two years my friend worked for 28% of collections – of his own production of the normal $750,000 he had always produced. Therefore, he earned a salary of $210,000 for the same work he did when he took home $375,000. It gets even worse as his salary of $210,000 was completely taxed. His previous profit of $375,000 had many legal tax advantages. His tax bill would actually be higher as a $210,000 employee, compared to being an owner with a $375,000 profit! He did not realize that he was actually being paid 50% of his own production as an owner ($375K/$750K). Conclusion: You can take home about twice as much money for the same amount of production as an owner, compared to being an associate.

“But I’m already $400K in debt from dental school and can’t afford to buy a practice until I’m in a better financial position.”

I hear this every week from young dentists. The reality is that I do not believe dental students understood the magnitude of their debts before attending graduate school. Complete a debt service analysis, and it is frightening what it takes to pay off undergraduate and graduate school debt in a timely manner. While I can certainly understand the fear of adding to that debt with a practice purchase, the reality is, the best way to retire all this debt is to get paid almost twice as much for the same amount of work as you would be paid for being an associate.

In the above example, the debt service to buy that practice at the average national percentage of collections to purchase a practice of about 70%, would be about $26,000 on a 10-year note. So, that means choosing between making $210,000 fully taxed, or a profit of about $349,000 after debt service, that is not fully taxed. That extra $140,000 a year (approximate) would go a long way in paying off school loans.

“Ok, I get it. But I want to buy a smaller, less expensive practice to get started.”

Dentist chair in a dentist officeI also hear this comment every week. But, if you do the math, a less expensive practice does not work unless you can guarantee an extremely high growth trajectory. If you were to buy a practice doing only $500,000 a year, you could not expect the same percentage of profit, due to the fixed expenses of rent, utilities, some staff, insurance, dues, and other expenses. So, the percentage of profit in this smaller $500K practice might only be 30%, or $150K. While the debt service is only $13K, your profit after debt service of about $137K is about the same as you could make as an associate somewhere else. Technically, you would still be taking home more as a percentage of the dentistry performed, but it would be more difficult to pay off your debt with that income. Plus, the extra cost of the debt service to own the practice that profits an extra $210,000 is only an additional $13K per year. So, if you can handle the workload, an extra $13K a year in debt services results in $210,000 net profit. How many years and marketing dollars would it take to bring the $500K practice to $1,000,000? It is a real obvious choice.

“Ok, so clarify ’almost always.’”

As a buyer, you need to do your own due diligence for any practice to determine if YOU can duplicate the production the selling doctor makes to get to the numbers presented. As mentioned, the $1,000,000 practice consists of $750K of dentistry from the doctor’s two hands. Assuming you are willing to work 49 weeks a year, you would need to produce an average of $3,000 a day in dentistry. Obviously, a crown fee of $800 compared to $1,200 makes a big difference, so you need to compare what you can produce on THE FEE SCHEDULE OF THE PRACTICE YOU ARE PURCHASING. You need to verify that the treatment plans presented to the patients are consistent with what you would personally diagnose. Many times, a retiring dentist refers out a great deal of dentistry that you might be able to do. This factor is normally a much greater benefit to you than any other perceived issue with the practice, or a possible reduction in fees, due to a possible Delta insurance issue.

Know yourself.

Some of you may never be “big producers.” That is a relative term and there is nothing to be ashamed of if you fit into that category. If you do, you might be best suited for an associate position that pays a healthy per diem salary or a government type of position. I personally worked for corporate dentistry, just out of school. It was a great training ground to learn how to triage a busy schedule and hone my skills and hand speed. If you can produce $3,000 a day, you are ready for the practice mentioned above. (Again, that level of production will be different, depending on the fee schedule.) My first practice loan had an interest rate of 12%. While your school loans are greater than mine, record low interest rates now of 3.5% to 4.0% enable you to take on this additional practice debt. For these reasons, my advice is to purchase the largest practice you are capable of handling to pay off your school loans as quickly as possible once you hone your skills. Eventually merging two smaller practices into one is also an option I will discuss in a future article.

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 more 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 loans and seller financing.

Conventional banks who specialize in financing dental practices may provide up to 100% financing. This means 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 loans are made available through local lending partners who can offer traditional term loan options. Borrowers are typically required to cover a percentage of the borrowed amount. Depending on the lenders’ expertise the process can be very fluid. Trust your advisors when choosing a small business 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.

Chart with terms of loan and loan amountTerms offered vary from lenders but 10, 15 and 20 year terms are among 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 policy 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 lenders 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 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.

No two practices and no two buyers are alike. 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.

We are often asked by potential dental practice sellers what they need to do in order to get their practice ready to be sold. The following are:

TEN TIPS TO PREPARE YOUR PRACTICE FOR SALE

1. PLAN AHEAD
In today’s market, selling a practice is “easier said than done”. It is necessary for you to plan well in advance for the sale of your practice. Depending on your location, metropolitan to rural could be six months to several years.

Dental practice waiting room2. CLEAN UP THE CLUTTER
Don’t underestimate the impact of first impressions. Patients walk in the front door and so do buyers. Most practices have accumulated years of clutter (books, journals, old dental equipment, and artifacts). All areas of the practice need to participate in de-cluttering. Institute a monthly or quarterly clean up so that you don’t draw too much attention to what you are actually planning. Buyers will expect an office to be organized and clean.

3. SPRUCE UP THE DÉCOR
Like the appearance of your home, the practice should look neat and tidy when attempting to sell it. Some low-cost items like carpeting, wallpaper and paint can do wonders for the appearance of an office and enhance its appeal. Make sure all the lights are working and that they are all giving off the same type of light.

4. GET YOUR FEES IN LINE
No buyer wants the first order of business to be raising fees! If your practice has been lacking in updating your fee schedule, do so in preparation of its sale. Fees should be evaluated regularly and adjusted accordingly. There are a number of resources available to help. An average to above average fee schedule shows a patient acceptance of quality dentistry.

5. REVIVE YOUR RECALL SYSTEM
Hygiene usually accounts for around 25% of the practice revenue in a general practice. If your number is less than this maybe your recall system needs a boost. Some aging practices evolve into a voluntary recall system. Instituting an active recall system will not only increase your production, but your active patients and patient flow.

6. TUNE UP YOUR DENTAL AND OFFICE EQUIPMENT
Although it is not advisable to make major equipment purchases immediately preceding the sale of your practice, it is advisable to get your equipment functioning well, and if necessary, replace or add certain items. For example, recovering a dental chair or replacing a cabinet facing are a few items that can enhance the practice’s appearance and productivity. Today’s buyers are seeking more modern equipment and technology. Invest wisely and consult with a trusted advisor before committing.

7. WEED OUT THE “BAD” ACCOUNTS RECEIVABLE
Some practices have accounts receivable that should have been turned over to collections or written off. This should be done on an ongoing basis; however, it is imperative to handle these accounts before the practice is sold.

8. DON’T LET YOUR LEASE LAPSE
With some exceptions, it is important that the buyer have a facility in which to practice. If you lease your space, be sure that your lease is current and that renewal options, assignments and/or new leases are available to a buyer. Most buyers will require financing and today’s healthcare lenders require a minimum remaining term of five years, which can be made up with options. In many cases, the new buyer will be negotiating a new lease for the facility. Caution: please check with your advisors before signing a long-term lease. If your plan is for the next few years, a series of one- or two-year renewal options might be a good choice.

9. MAINTAIN YOUR PRODUCTION
In anticipation of the sale of the practice, some doctors cut back significantly on their schedules, thus affecting the practice’s production, new patients, vitality and ultimately, value. It is critical that the practice’s production does not slide prior to sale. The number one negative effect on a practice’s value is declining revenues. On the flipside, don’t accelerate your treatment plans. Leave some meat on the bone. Buyers and advisors may recognize this and it could have a negative impact on your value.

10. CHECK WITH YOUR ADVISORS
Before you make what may be a “once in a lifetime” decision, you should check with the people you trust the most. Counsel from financial advisors (to check on the financial feasibility of retiring), accountants (to check on the tax ramifications), attorney (to check on any legalities or estate planning issues), and a competent experienced practice broker (to pull the whole thing together) is essential for a successful transition.

“No time like the present” has never been more appropriate than right now when it comes to protecting your practice from any form of an infection. And, while patient well-being is always first and foremost, there’s a secondary concern about an infection incident that can impact a practice – image and value.

Anything that adversely affects your practice can jeopardize the value of your practice if you are thinking about selling it. That is why ensuring standard precautions are followed to prevent and minimize infection are so important.

The Center for Disease Control and Prevention has in-depth guidelines for preventing and minimizing infection in dental health care settings. The full document can be found here.

Hand sanitizer and masks

Standard precautions should include:

1. Hand hygiene
2. Use of personal protective equipment
3. Respiratory hygiene/cough etiquette
4. Sharps safety
5. Safe injection practices
6. Sterile instruments and devices
7. Clean and disinfected environmental surfaces

Hand Hygiene – Performed:

– When hands are visibly dirty.
– After touching any instrument, device, or any other object that may have come in contact with blood, saliva, etc.
– Prior to and following patient treatment
– Immediately following removal of gloves

Use of personal protective equipment:

1. Provide sufficient and appropriate Personal Protective Equipment (PPE) and ensure it is accessible
2. Educate all DHCP on proper selection and use of PPE
3. Wear gloves whenever there is potential for contact with blood, body fluids, mucous membranes, non-intact skin or contaminated equipment.
4. Wear protective clothing that covers skin and personal clothing during procedures or activities where contact with blood, saliva, or OPIM is anticipated.
5. Wear mouth, nose, and eye protection during procedures that are likely to generate splashes or spattering of blood or other body fluids.
6. Remove PPE before leaving the work area.

Respiratory hygiene/cough etiquette:

1. Implement measures to contain respiratory secretions in patients and accompanying individuals who have signs and symptoms of a respiratory infection, beginning at point of entry to the facility and continuing throughout the visit.
     a. Post signs at entrances with instructions to patients with symptoms of respiratory infection
     b. Provide tissues and no-touch receptacles for disposal of tissues.
     c. Provide resources for performing hand hygiene in or near waiting areas.
     d. Offer masks to coughing patients and other symptomatic persons when they enter the dental setting.
     e. Provide space and encourage persons with symptoms of respiratory infections to sit as far away from others as possible. If available, facilities may wish to place these patients in a separate area while waiting for care.
2. Educate DHCP on the importance of infection prevention measures to contain respiratory secretions to prevent the spread of respiratory pathogens when examining and caring for patients with signs and symptoms of a respiratory infection.

Sharps safety:

1. Consider sharp items (e.g., needles, scalers, burs, lab knives, and wires) that are contaminated with patient blood and saliva as potentially infective and establish engineering controls and work practices to prevent injuries.
2. Do not recap used needles by using both hands or any other technique that involves directing the point of a needle toward any part of the body.
3. Use either a one-handed scoop technique or a mechanical device designed for holding the needle cap when recapping needles (e.g., between multiple injections and before removing from a non-disposable aspirating syringe).
4. Place used disposable syringes and needles, scalpel blades, and other sharp items in appropriate puncture-resistant containers located as close as possible to the area where the items are used.

Safe injection practices:

1. Prepare injections using aseptic technique2 in a clean area.
2. Disinfect the rubber septum on a medication vial with alcohol before piercing.
3. Do not use needles or syringes* for more than one patient (this includes manufactured prefilled syringes and other devices such as insulin pens).
4. Medication containers (single and multidose vials, ampules, and bags) are entered with a new needle and new syringe, even when obtaining additional doses for the same patient.
5. Use single-dose vials for parenteral medications when possible.
6. Do not use single-dose (single-use) medication vials, ampules, and bags or bottles of intravenous solution for more than one patient.
7. Do not combine the leftover contents of single-use vials for later use.
8. The following apply if multidose vials are used
     a. Dedicate multidose vials to a single patient whenever possible.
     b. If multidose vials will be used for more than one patient, they should be restricted to a centralized medication area and should not enter the immediate patient treatment area (e.g., dental operatory) to prevent inadvertent contamination.
     c. If a multidose vial enters the immediate patient treatment area, it should be dedicated for single-patient use and discarded immediately after use.
     d. Date multidose vials when first opened and discard within 28 days, unless the manufacturer specifies a shorter or longer date for that opened vial.
9. Do not use fluid infusion or administration sets (e.g., IV bags, tubings, connections) for more than one patient.

Sterile instruments and devices:

1. Clean and reprocess (disinfect or sterilize) reusable dental equipment appropriately before use on another patient.
2. Clean and reprocess reusable dental equipment according to manufacturer instructions. If the manufacturer does not provide such instructions, the device may not be suitable for multi-patient use.
     a. Have manufacturer instructions for reprocessing reusable dental instruments/equipment readily available, ideally in or near the reprocessing area.
3. Assign responsibilities for reprocessing of dental equipment to DHCP with appropriate training.
4. Wear appropriate PPE when handling and reprocessing contaminated patient equipment.
5. Use mechanical, chemical, and biological monitors according to manufacturer instructions to ensure the effectiveness of the sterilization process. Maintain sterilization records in accordance with state and local regulations.

Clean and disinfected environmental surfaces:

1. Establish policies and procedures for routine cleaning and disinfection of environmental surfaces in dental health care settings.
     a. Use surface barriers to protect clinical contact surfaces, particularly those that are difficult to clean (e.g., switches on dental chairs, computer equipment) and change surface barriers between patients.
     b. Clean and disinfect clinical contact surfaces that are not barrier-protected with an EPA-registered hospital disinfectant after each patient. Use an intermediate-level disinfectant (i.e., tuberculocidal claim) if visibly contaminated with blood.
2. Select EPA-registered disinfectants or detergents/disinfectants with label claims for use in health care settings.
3. Follow manufacturer instructions for use of cleaners and EPA-registered disinfectants (e.g., amount, dilution, contact time, safe use, disposal).

Infection prevention is key in protecting the health and well-being of both your patients and your practice. For additional information and current updates, please visit www.cdc.gov today.

I’m currently doing an analysis for a client who will be selling his practice. It’s rare that someone who has been offered 120% of their gross income for their practice and an offer to work for five years after the sale for $350,000 per year would bother to ask if that was a good deal or not, but this dentist did. Here’s the statistics of this actual real-life practice and that offer he received.

 

Price Offered 120% of gross, cash at closing$4,200,000
Five years of commission at $350,000 per year$1,750,000
Stock$250,000
Total Revenues$6,200,000

 

So what is there to think about? Just grab the money and run, right? But on the advice of his sage accountant, he called me and asked, “Earl is this really a good deal for me?” I told him it depends. Compared to what? Comparing this delicious offer to an alternative option, that of keeping his practice for the next five years and then selling it for $2,900,000 or 75% of his gross to a buyer who wouldn’t require him to stay on. And he could retire. Let’s take a look at this seemingly less attractive option.

 

Practice Price  75% of gross, cash at closing$2,900,000
Five years practice net income$6,900,000
Total Revenues$9,800,000

 

Now I do realize that an extra $3,600,000 may not mean a lot to some dentists, but for those it does, we should understand how the difference came about. It’s obvious that the sale price in the wait-to-sell option is considerably lower, however the seller earns over $5,000,000 more net income by working for himself instead of someone else. This owner currently nets 54% of his personal (not the gross) production and the buyer’s offer was only 15%, providing they did not load him up with extra work from new managed care plans, thus making that percentage lower.

There are great bragging rights by selling your practice for 120% of gross, but understand that it is the seller paying that price, not the buyer.  By the way, these results are consistent with practically any size practice, not just this mega practice.

So, the takeaway from this little story is don’t be flattered by high price offers and bamboozled by terrible terms.  It’s always a good idea to seek expert guidance in reviewing critical options before finding out the hard way that price is not always what it’s cracked up to be.  Remember it’s the bottom line that sellers walk away with, not the top one.

Earl M. Douglas, DDS, MBA, BVAL is principal of ADS South, LLC. The firm provides consulting, valuation, analysis, partnership and brokering services.
www.adssouth.com
770-664-1982
earl@adssouth.com