Thursday, March 30th, 2023 | by Kevin Cooper, M.B.A.
Avoid the “Potential” Pitfall When You Sell Your Dental Practice
Selling a dental practice can be challenging and ensuring that you sell your dental practice for the right value is crucial. A successful dental practice sale needs careful planning to get the best return on your investment.
The selling process can be complicated when you’re ready to sell your dental practice. It’s best to avoid costly mistakes and pitfalls. Covering tips like increasing collections, working as an associate dentist, and selling to a DSO, we explore several ways to avoid selling your dental practice for less than what it’s worth and avoid the “potential” pitfall.
Avoid the Financial Pitfalls When You’re Ready to Sell Your Dental Practice
Imagine the following scenario:
One day after practicing dentistry and running your office for 30-40 years, you decide that you’re ready to retire. You built a successful practice, but you’re exhausted and ready to transition your practice to someone who can continue it for another 30+ years.
You contact your local ADS Dental Transitions dental broker, have a discussion, and arrange a meeting at your office. The broker arrives and you give them a tour of your office, which you have continued to invest in over the years. You don’t have all the latest technology, but you’ve kept up enough that a dentist could purchase your practice and not need to make any major changes for at least 6-12 months.
After the tour, you and the broker sit down to discuss the process of selling your practice, and the issue of pricing comes up. The broker tells you that there are many factors that go into determining an opinion of value, including profit margin and cash flow, but in your market most practices sell anywhere in the range of 50% – 80% of collections. The broker asks what your collections were last year, and you say that you cut back to two days a week and collections were around $250,000.
You can’t possibly imagine selling the practice for less than $200,000, however. You explain to the dental broker that five or six years ago, when you were working five days a week, your collections were upwards of $900,000. The practice is perfect for a younger dentist to return it back to five days a week. It has so much POTENTIAL.
You feel it should be able to sell for at least $500,000. Unfortunately, that will not be the case. The reality is that you can’t sell potential, a buyer isn’t paying for potential, and a bank won’t finance potential.
Don’t Sell Your Dental Practice Based on “Potential”
In the example above, the Dr. essentially retired on the job and let the practice dwindle down to the point where it might make more sense to sell the charts to another local dentist and close the doors. Most dentists, however, do not want to do that. They’ve spent most of their lives building a successful dental practice and they feel an obligation to their patients to ensure they continue to receive excellent care from the practice.
So back to why “potential” is an issue. The short answer is that buyers don’t buy potential and lenders won’t finance potential. When buyers look at a practice, they want to purchase something that has a good profit margin and cash flow so that within the first month or two, they are seeing revenue come in.
A buyer will not take on more debt by overpaying for a dental practice with the hope that they will be able to build the practice up in the next three to five years. Keep in mind many of these buyers, assuming they are a few years out of dental school, still have a significant amount of debt in the form of student loans.
So how can you avoid this “potential” pitfall? It may seem obvious, but you need to plan ahead. Most dentists have a general feeling for when they will want to retire, assuming they are physically and financially healthy. In most situations, if you start planning approximately five years before you are ready to be out, you should be at a point where you haven’t started cutting back on days and your collections are still close to, if not at, their high point.
The earlier you plan ahead, the more options you’ll have when you’re ready to sell your dental practice,.
Stay On as an Associate Dentist
You could sell your dental practice and then stay on as an associate. Cut back your days over a few years and not have to worry about running the practice.
Sell Your Dental Practice to a DSO
You also have the possibility of selling to a small group of dentists looking for another practice to acquire, or in some cases depending on the size of your practice, a DSO may be an option.
Other buyers are less likely interested in your practice if the numbers have declined over the last few years.
Discuss Your Selling Options With a Dental Broker
You can start by contacting an ADS Dental Transitions broker to begin the conversation. The broker can discuss various options based on your goals, and assist with an appraisal of the practice. This allows you to have a feel for the current value.
The dental industry is one of the few where lenders will finance 100% of the purchase price. They may lend upwards of 10% in working capital even to buyers who still carry school debt. This assumes they can do the same procedures as the selling Dr. or more.
This is because the default rate in dentistry has historically been less than 1%. The bank, however, must make sure that the numbers work, and in most cases, they will look at the previous year’s tax return, a year-to-date P&L, and the financial strength of the borrower.
Determine Profit and Cashflow Before Getting a Dental Practice Valuation
Two important factors considered in a dental practice valuation mentioned earlier are profit and cash flow. What the practice collected five plus years ago is irrelevant and it won’t be considered in a financing decision.
In conclusion, selling a dental practice requires careful planning to prevent costly mistakes. Avoid the “potential” pitfall and sell your dental practice for what it’s worth.
If the scenario above resonated with you, either because you are at that point, or are a few years away from being ready to retire, contact an ADS Dental Transitions expert and start the conversation so that you don’t face the selling on “potential” pitfall!
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