You’ve worked for years in your practice. You’ve provided great care for your patients. You’ve helped your practice grow. It’s been your business, your career – you’ve poured your life into your office, your patients, and your team.
And now you’re thinking about selling your practice.
Most dentists will face this decision at least once in their careers. There are many reasons to consider a practice sale. Retirement is still the number one reason dentists sell, but it’s becoming more and more common for practice owners to sell before retirement. Some want to sell half now and add a partner. Others want to sell 100% and become an associate in the practice they just sold so they can focus solely on the clinical patient care and not management. Still others are looking to relocate or are forced to sell because of a disability.
No matter why you’re contemplating the sale of your practice, it’s always a serious decision that must be carefully considered and planned. In this guide, I will help you prepare for the sale of your dental practice, walk you through the different steps, and provide a plan that you can use to make sure that 1) the new dentist will continue to provide great care for your patients and 2) you receive top dollar for all of your hard work.
Are you ready to sell your dental practice?
There are a number of different steps you should take to be ready to sell your practice. All of them deserve solid and smart planning.
First, are you ready for the change? Some doctors sell their practices, walk away, and never look back. Retirement can be an exciting adventure, with time to do the things you’ve always wanted to do. Many doctors decide to sell their practice while continuing to practice dentistry, which can be a wonderful way to sell now when your practice value might be at its peak, then enjoy working for the new owner without the management hassles!
Second, are you financially ready to sell your practice? Realistically, a practice sale cannot fund 100% of your retirement, though it can certainly help! Building a relationship with a financial advisor and carefully discussing your needs is a crucial first step to thinking about selling your practice. A good advisor will consider your lifestyle, retirement goals, charitable goals, obligations to family, etc. and then provide you with solid information. Give me a call if you’d like a great recommendation.
Third, is your practice ready? As we will make clear below, the most important thing you can do to keep your practice value solid is to maintain your production levels and maximize your net income. Large capital expenditures, like brand new equipment, might not be the best decision right before you sell (except for digital radiography, which most younger buyers will insist on). It is a good idea to spruce up your practice with simple and cost-effective cosmetic changes, like fresh paint or new flooring.
Once you’ve decided that you’re in a position to sell your practice, you’re probably asking…
What’s my dental practice worth?
There are many factors that influence practice values. Market conditions, location, build out, curb appeal, practice age, the age and condition of equipment, the level of technology in the practice, and the recent income trends all contribute to practice value.
However, at the end of the day, the value of a dental practice is determined by cash flow. The greater the revenue (collections) and net income (doctor take-home pay), the higher the practice value will be. From the buyer’s perspective, it only makes sense to purchase a dental practice if the practice generates sufficient cash flow to pay overhead, pay the loan on the practice and have enough left over to provide a reasonable income for the buyer and his or her family.
Learn more about how to value a dental practice.
What’s the dental practice sales market like?
The market for dental practices is currently in the middle of a shift from a seller’s market to a buyer’s market. There are a few important trends responsible for this shift.
- More Sellers: There are a large number of dentists that graduated about 35 years ago and are looking to retire. Additionally, many doctors took a financial hit during the 2007/8 financial crisis, are now recovered and selling for retirement.
- Fewer Buyers: There are fewer buyers than sellers. (The number of dental-school graduates is increasing again after a long decline, but young dentists are much less focused on ownership than prior generations, creating fewer buyers compared to sellers).
- More Expensive Bank Loans: Interest rates are going up on dental practice loans, making these loans more expensive for buyers. This reduces buyer-purchasing power, disqualifying some, and reducing the overall number of available buyers in the marketplace. Practice values go down when interest rates go up.
With the supply of dental practices slowly increasing relative to the number of potential buyers actively seeking to own a dental practice, the ‘power’ in the transaction is shifting from sellers to buyers. This trend will likely continue for several years.
This means that if you are considering selling your dental practice, now may be the right time. As I explain below, there are good options for selling all or part of your practice now, even if you’re not ready to retire!
Transition Options for Dentists
There are many different transition models when you’re looking to sell.
- Sell and retire now. This has been one of the most common transition models, and with good reason.
- Add a partner or associate. Selling a percentage your practice is becoming increasingly popular among dentists.
- Sell and work back as an associate. This option is also increasing in popularity as dentists look to maximize the value of their practice without walking away from clinical practice.
It’s important to talk to a qualified advisor when you’re considering these options. This should be someone who listens carefully to what you want to accomplish in a transition, understands dental practices, and is familiar with dental practice sales. Please feel free to call me any time to discuss your options.
Preparing for the Sale of Your Dental Practice
As you prepare for a practice sale, there are a number of important considerations.
Maintaining Your Business
If you’re like many dentists, you started thinking about selling your practice after you started slowing down, taking more vacation days, and being less diligent about collecting money. The graph below represents the typical trend.
If you want to get the most for your practice, don't let production and your net income start to drop off! Maintaining your business is the single best thing you can do to optimize the value of your practice.
Gathering Your Team
Selling your practice is a team effort. In addition to your financial advisor, you will need an attorney, accountant, and broker. It is also a good idea to speak with a dental consultant prior to selling. Both increasing your profitability and strengthening your systems in the years leading up to a sale can make a big difference in the sale price.
When you’re choosing a broker (or deciding to represent yourself), some important considerations include:
- Does the broker specialize in dental practice sales?
- How long has the broker been working in your market?
- What does the broker expect me to do? What will they do for me?
- How does the broker market my practice to the widest set of possible buyers?
- What is the broker’s reputation for honesty and ethical dealing?
- Do lending institutions recommend and work closely with the broker?
Once you decide together with your broker that it's the right time to sell your practice, the next step is to sign a listing agreement and let your broker go to work on your behalf.
Note: We use “broker” and “agent” somewhat interchangeably in this blog. At IPS, we have brokers and agents that do virtually the same jobs. Actually, a broker hires agents and/or other brokers to work for them. A broker is an agent with advanced certifications. The Bureau of Real Estate (BRE) requires a broker be involved in every sale. (I’m a broker.)
Preparing for Marketing – Valuation and Prospectus
As long as you have decided to work with a broker team who knows the current market, they will work hard to place the right value on your practice. After valuing your practice, your agent will discuss pricing your practice. Depending on the market and your individual needs, it may make sense to price a little high and wait for the right buyer, or price a little low and start a bidding war. This is something you should discuss with your broker or agent.
It’s important for your agent to review their Opinion of Value and Practice Prospectus with you for your input. After all, no one knows your practice and locale better than you. Once a value has been placed, a listing price set, and a prospectus created, you’re ready to go on the market.
On the Market
Your broker will use their access to the market to put your practice in front of as many potential buyers as possible. This will usually include some mixture of trade publications (like the Dental Trader or Dental Shopper), journals (especially for specialty practices), online marketing, and direct mail.
Different brokers offer different levels of confidentiality in their advertising. Some make it very easy to figure out that your practice is for sale without making the buyer sign any type of confidentiality document (a Non-Disclosure Agreement). In our opinion, this runs too high a risk of patients and team members finding out, which may lead to a messy transition and, ultimately, the devaluation of your practice. Remember: the value of your practice is protected when you carefully manage the transition and introduce the patients and staff to the new doctor in the way that will maintain the goodwill you’ve worked so hard to build.
Once the broker identifies a number of interested potential buyers through their marketing efforts, they should work to qualify those buyers. A successful transition depends on matching the right buyer with the right seller. This ensures that the care and hard work you’ve put into your practice and patients continues to benefit the new buyer.
Remember that before you find a buyer, it is crucial that you continue to work as normal. Continue to accept new patients, stock supplies, schedule patients, keep up with recall, and all the other details that make a dental practice run smoothly. You’re selling a fully-functioning business, so don’t do anything that would stop the business from prospering.
Negotiating the Deal
Once a qualified and willing buyer has been identified, your agent will work with both buyer and seller to negotiate a fair deal.
Letter of Intent
The first step in the process is for the buyer to submit a Letter of Intent (LOI) to the seller. This is a non-binding agreement that summarizes the basic terms and conditions of the transition. It will specify a period of due diligence, where the buyer has access to the books and records of the practice, and conditions based on financing. It should also include a closing date and should be accompanied by a refundable earnest money deposit.
Lease negotiations can sink a deal. We’ve seen it happen, and it’s not pretty. If you own the real estate and are planning to sell it along with your practice, then this does not apply to you. If you own the real estate and are not planning on selling it, your broker can prepare a lease for prospective buyers.
If you lease your space, it is a good idea to review the lease as early as possible. Because the lender typically requires that the terms of the lease run as long as the loan, lease negotiations can hold up financing. Some landlords can be difficult to work with, and they often see the sale of a dental practice as an opportunity to dramatically increase the rent. Working with your landlord and trying to help them be as reasonable as possible is a time-sensitive issue.
We encourage the buyer to hire an attorney to represent them in the lease negotiations and get the process started ASAP. However, where there is a large management company operating the facility, the broker is sometimes able to help by requesting Tenant Application forms and explaining the management company’s process to the buyer.
Securing Financing for the Buyer
In most cases, your broker can assist the buyer with obtaining financing for your practice. Make sure that your broker has good relationships with a variety of lenders.
The due diligence period if the time when the buyer will verify to their satisfaction all the details of the practice.
- Some buyers hire a management consultant as independent advisors to analyze your dental practice, including office business systems, scheduling, financial arrangements, team wages and benefits.
- Some buyers will hire an accountant to do a “review of books and records”, where the taxes, profit and loss statements, balance sheet, and bank statements will be reviewed and reconciled. (Note: reporting all of your income 2-3 years before selling can help the accountant and the lending bank support the price of your practice.)
- Some buyers will ask a supply rep or equipment specialist to review the equipment in the office.
- Escrow will perform a lease and lien search to ensure your practice can be sold free and clear.
- Buyers will work with their bank to ensure the cash flow is available for the buyer to pay back the loan and meet living expenses. Most banks want 125% of the buyer’s total expenses to be covered by the practice income.
- The lease will be reviewed and, if necessary, renegotiated. It’s ideal to have the lease reviewed by an attorney many months before you put the practice on the market to prevent surprises.
Purchase and Sale Agreement
Once the due diligence is complete (office reviewed, lease negotiated, and financing settled) the buyer’s and seller’s attorneys will work out the Purchase and Sale Agreement (PSA). This document will spell out the terms and conditions of the sale, including the payment terms, parameters of the restrictive covenant, and closing date.
Close of Escrow
Shortly before escrow closes, it’s time to introduce the buyer to the team. Once you close escrow (and not before!), start introducing the buyer to your patients. This is a process that should be carefully managed, and there are several good strategies for a smooth transition that are easily adopted. If your broker is also a consultant (like us), they can walk you through this process step by step and help you avoid the pitfalls we see regularly.
And just like that, you’re free! Patients cared for. Money in the bank.
While the process is complicated, the right broker can make it simple, allowing you to enjoy the final days as owner of your practice with minimal stress.
If you’d like to consider listing your practice with Integrity Practice Sales, the first step is to make an appointment with an agent, who can discuss your options for transition and provide a rough value for your practice in a no-cost and no-obligation consultation.
We have agents located across California to serve you.