Getting a Dental Practice Ready for Sale: Setting a Goal and Making a Plan (Part 2 of 2)

In Part I we left off with planning, building a checklist, and working with a dental practice brokerage to come up with a winning marketing and selling strategy.

Make It a Team Effort

The best way to achieve a successful sale of a dental practice is to have a thorough plan. Dental practice brokerages will assist with the details in advance of the anticipated sales date.

Perhaps the greatest benefit of working with a dental practice broker is that you can maintain your focus on your own patients and practice.

Communicating Effectively with a Broker

Effective communication is the key to maximizing your selling experience, and it can help you build a substantial relationship with a dental practice brokerage.  While big data is a hot topic, pertinent information, communicated to a broker, needs to specify your wishes and expectations. With that in mind, we put together some suggestions for your checklist:

Points to Consider

When do you want to sell your business?

Think about a specific date that fits your timeline, and consider that setting a later sales date will allow for more detailed planning today.

Why do you want to sell your practice?

The majority of sellers do so in order to retire. However, a practice could be sold for other financial reasons, such as financing another business opportunity. Remember that the business is an asset; there are several options to consider even if the objective is retirement.

Is your dental practice fiscally fit?

Is it time for a check-up? A lot of small businesses prepare their financial statements to minimize owners’ tax liability. It is vital that your financials reflect true earnings to maximize the value of the practice. Make sure that your financials show true earnings.

What is your selling price?

Determining a selling price of a medical practice is a complicated proposition, and there are tangible and intangible variables to consider. The value of your practice is largely determined by financial statements, tax returns, and potential future opportunity. Comparing marketing and advertising efforts with your current demographic may also offer some insight into the value of your practice.

Transition Smoothly

A key issue to consider before selling your dental practice is the impact the sale will have on your key employees. Be fair, open and honest about your decisions. It is important to communicate clearly with the people that are going to feel the initial impact of this transaction. It is a sensitive issue that requires delicate handling.


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Getting a Dental Practice Ready for Sale: Setting a Goal and Making a Plan (Part 1 of 2)

Regardless of the profession or industry, most owners hope to eventually sell their business. For many, this is how they retire comfortably, especially those in the medical profession. Not only is the owner of a dental practice a medical professional, she is also a small business owner and an entrepreneur. Likely, it is up to the business owner to keep the practice and the profession running smoothly.

Plan Today to Sell Tomorrow

A plan is a purposeful course of action taken to achieve an objective, a goal, or a specific purpose. If your long-term objective is to sell your dental practice, you need to establish a plan to sell it the right way. Putting together a map for a strategy is a relatively straightforward process if you effectively apply critical thinking. Plans are crucial in order to capitalize on opportunities and manage problematic situations.

Checklist It

Simplify the planning process by answering a few basic questions:

What needs to be done today to make my practice salable for the best price tomorrow?

Yes, the plan to sell the business is long-term, but thinking of your practice as a business and treating it as such will pay off tenfold. Knowing the current and future value of your business is important to know at all times.

 Are you doing everything possible to maximize profits?

Keeping your dental practice in peak financial shape by understanding its potential growth and sustainability is a good habit to maintain from day one. Keeping your business market-ready for sale could grab the attention of potential buyers and generate a substantial premium while appealing to a bigger market.

If retiring, when do you want to sell your dental practice?

Determine the actual selling date.
A plan should be in place about two to five years ahead of your retirement date. Also, keep in mind that many buyers would require an owner or a few key employees to remain with the business to facilitate a seamless transition.

Commit to selling and to potential buyers by understanding the crucial variables of your business.

Selling a business effectively and efficiently is a process. While many dental practices are sold through brokerage, maintaining an entrepreneur’s perspective of your practice fosters clarity and critical thinking principles. Before seeking professional assistance, it is best to have a game plan established.

Build your own selling plan by working out the details in advance.

Preparing your dental practice for sale, will make your business better today, tomorrow, and for the next owner.

We will continue this two-part piece with specific details to prepare your dental practice for sale.


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Tax Implications of Dental Practice Transitions

Every year, you have to think about taxes—both personal and professional (certainly when you own your own dental practice). There are a few strategies to engage in order to minimize tax implications when embarking on a dental practice transition.

There are a number of ways to structure the sales of a dental practice. Please consult with your NAPB dental practice broker as well as an accountant and tax law attorney to confirm that you are making sound decisions regarding the specifics of the deal.

The following are a few tax considerations when selling a dental practice:

  1. Schedule the Sale. When you sell can be just as critical (if not more so) than how or why you sell your dental practice. When you sell a tangible asset, you will be paying taxes during that tax year on your personal income. So, depending on your post-sale plans, it can be smart be strategic about when you sell the practice. For example, if you are selling to a partner and you are continuing to work, there will be less impact to your annual income than if you are retiring immediately after the sale. In the latter case, it might be wise to wait until the next calendar year so the sale happens in a year with reduced personal income.
  2. Long-Term Plan. If you are planning to sell your practice and then buy another one in a short period of time, there are some ways to postpone the taxes (that would not be possible if it were a direct sale). A 1031 Exchange is one way to do this; however, it’s a complex arrangement so be sure to consult with your team about this option. To the contrary, if you have only owned a practice for a short time and you’re planning to sell it with no intention of buying another practice, I advise against it. Do not sell if you have owned your for less than twelve months. In this scenario, it’s advisable to wait a full year before you sell in order to avoid a high short-term capital gains tax.
  3. Business Plan. As we’ve discussed in previous articles, a dental practice valuation can sometimes be challenging because every practice has both tangible and intangible assets. The tangible assets are relatively easy to quantify, but the intangibles are much more challenging to determine, and this can become even more complicated with taxation. If you are not operating as a sole proprietor, but instead are incorporated, you face the possibly of being taxed twice on the intangible components when selling a dental practice. So, the IRS taxes both the distribution as personal income and also taxes the capital gains inside the corporation. Again, it is wise to consult with a dental practice broker and they can often connect you with accountants and lawyers versed in dental practice transitions.
  4. Structure of Loan. Some sellers are under the impression that they can save on their taxes if they carry the loan for the buyer when selling their dental practice. In other words, the buyer pays the seller over time and thus the seller can avoid taxes. That’s not accurate. The tangible assets from the sale will be taxed during the year the practice is sold, whether the buyer pays you the entire amount at the time of sale or you negotiate a payment plan over time. Therefore, it’s a good idea to know the amount of the taxes so you can structure that currency influx into the deal.

Consult with your NAPB dental practice broker today. They can formulate both a plan and help cultivate a team to advise you about tax implications, ultimately garnering best outcomes for your dental practice transition.


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Dental Practice Appraisal: What You Need to Know, Part 2

In our last installment, Dental Practice Appraisal: What You Need to Know, Part 1, we took a closer look at the market value method of measuring value in a dental practice. Within that method, we investigated how the average annual revenue of the practice played a key part in determining market value (and greatly informed the list price) of the dental practice.

A complete dental practice appraisal encompasses many factors, and I encourage you to consult with an NAPB dental practice broker when contemplating that step. However, the intention of this article is to illuminate the income-based method and consider how this viewpoint measures value within a dental practice.

As we discussed, dental practice valuations can be somewhat puzzling. In an effort to simplify the process, let’s focus on one component—income—as a means of measuring the dental practice value. The income-based method is popular because it is often the best way to assign an accurate evaluation of the average annual revenue to the practice.

The income method takes into consideration both the history of the financial health of the practice as well as financial projections for the future. The income approach also measures the potential ROI (return on investment) in terms of the buyer’s ability to have a certain level of income and also a sense of possibility that they are taking on when purchasing this particular practice. In other words, ability to generate income is a primary consideration. Is the practice on a course to continue to do well? Or, will it need some serious TLC before it’s operating smoothly again? When focusing on income instead of market value, it is a bit easier to assess how quickly the buyer can pay down their loan when investing into a practice.

At the simplest level, income looks at a practice from the inside out whereas market looks at the practice from the outside in.

Typically, a dental practice is listed for approximately 125% – 175% of its average, adjusted net income. We define adjusted net income as total income after paying all operating expenses. For this calculation, anything paid directly to the current owner (such as pension plans, any salaries, personal taxes, etc.) are not included in the figure. So, if a practice brings in an annual revenue of $750,000 and the adjusted net income is $345,000 ($345,000 x 150%), then the value of the practice is approximately $517,500.

As we discussed with market value, it certainly seems simple enough. And it certainly provides a good starting point. It’s a calculation that allows you to look at a listing price and quickly get a sense of whether the seller is in a reasonable ballpark when selling their dental practice.

However, I recommend taking advantage of a free consultation with a local dental practice broker to gather knowledge about successful dental practice transitions.


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Dental Practice Appraisal: What You Need to Know, Part 1

Dental practice valuations can be confusing; sometimes it seems like there are a number of random factors both difficult to measure or even define when valuing a dental practice. Also, it can appear that you need a professor of economics to make sense of all the metrics involved in a thorough dental practice appraisal.

As funny as that might sound, it can be frustrating if you’re attempting to buy or sell a dental practice. The greatest measurement is: How much gross capital can the practice generate? That measurement is somewhat fluid as well because the ability for a practice to turn a profit is contingent upon both tangible and intangible assets.

Taking a look at those intangibles (such as community presence, patient loyalty, how well the office runs with existing employees, and how productive the vendor agreements) and tangibles (such as the state of  equipment, the building itself, furnishings, and décor) are all a part of measuring the overall value.

Before you schedule a formal dental practice valuation, it’s advisable to solicit the assistance of a local dental practice broker. They can guide you whether you are buying or selling a dental practice. There are three primary ways of assessing dental practice value: 1) Market, 2) Income, and 3) Asset. Asset is often employed when the practice is newly-opened. This is a less frequent circumstance so for the purposes of this article, we will focus on what to consider when looking at a value from a market or income standpoint.

Let’s begin by looking at the market as a means to measure the value in a dental practice. Most of us are familiar with the concept of market-value measurements because the most common method utilized to assess residential real estate. This tactic studies similar dental practices in the area and observes recent sales to get a sense of what a dental practice is worth.

There is often a “typical” formula to determine value in a market-value approach. For example, your NAPB dental practice broker most likely will pull sales prices of practices that have similar annual revenues to the practice in question in order to gauge market value.

For instance, Practice A has an average annual practice revenue of $700,000, and most practices in the area sold for 65% of their annual revenues. Therefore, the price for this Practice A is $455,000. Practice B has an average annual practice revenue of $850,000. If it sold for 65% of the annual revenue, the list price for Practice B would be $552,500.

So, with the practice in question, to determine the market value we start by finding out the average annual revenue. If the practice in question has an average annual revenue of $775,000 and it’s listed for $503,750, that’s a fair market price.

Easy enough, right? But what about income value? How does that play into the dental practice valuation? In Part 2, we’ll look at income value as a means of valuing a dental practice.


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Creative Dental Practice Transitions: Invest your Dental Practice into your Retirement Fund

As the dental practice landscape changes, there is no guarantee of cashing out a practice when you are ready for retirement. More alarmingly, at that point, there may not be enough capital to retire and that can affect both timing and day-to-day life in a negative way.

With an unpredictable marketplace (as the result of simple economics, HMO choices, and competitive marketing), it can be challenging to take care of your patients while simultaneously improving your work/life balance. It’s an even greater task to get yourself into an advantageous position for retirement when you’re a sole practitioner.

While their intentions may be admirable, many doctors find that the reality of being able to sock away cash is hindered by the impact it has on their life. The choices are the following:

  1. Work more hours,
  2. Lower your current standard of living, and/or
  3. Work a greater number of years.

Consult with an NAPB dental practice broker to gather information, even if you are years away from retirement. One creative solution is to sell the dental practice in stages. With the help of your dental practice broker, you structure an agreement to sell a portion of the practice to a younger dentist and you continue to working at the practice for another three, seven, or even twelve years. At each interval, you can sell another portion or work towards a buyout at the end of the agreed-upon term.

In this scenario, problem-solved. You can fund your retirement without having to add hours to your work schedule and without sacrificing your quality of life.

From a sheer economic standpoint, just look at the math:

SEPARATE PRACTICES SELLER BUYER
AGE 47 32
INCOME $235,000 $85,000
HOURS (PER WEEK) 32 36
EXPENSES 65% 75%
GROSS REVENUE $590,000 $280,000

 

PARTNERSHIP SELLER BUYER
AGE 47 32
INCOME $200,000 $182,000
HOURS (PER WEEK) 24 30
EXPENSES 40% 60%
FUNDED RETIREMENT $48,000 per year $12,000 per year
GROSS REVENUE $590,000 $280,000

By selling the practice in phases, the seller accomplishes the following:

  1. Works fewer hours,
  2. Keeps current standard of living,
  3. Works for fewer number of years,
  4. MOST IMPORTANTLY, funds retirement plan on an annual basis.

The buyer is also benefiting because they are working fewer hours, their income has increased, and they are investing in their retirement at a much earlier age.

Contact your local dental practice broker today for a free consultation. There are a myriad of creative ways to ensure a successful dental practice transition.


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A Buyer’s Best Bet: Components of the Dental Practice Appraisal

Buying a dental practice is significantly different from buying a medical practice. It’s an unexpected fact, but a medical practice in the same area with the same generation equipment and similar revenue will often sell for much less than a nearby dental practice. Why is that the case? The simple answer is: competition for patients.

In the dental business, finding, cultivating and retaining patients is a much more competitive endeavor. And it’s competitive in subtle ways. So, when considering a dental practice purchase, first enlist the support of an NAPB dental practice broker. They can guide you, and more importantly, then you are working with someone who has a long history of brokering successful dental practice transitions. A broker can help you navigate both the visible and less visible considerations when buying a dental practice.

On average, sellers are usually offering practices at a price that’s about fifty to seventy-five percent of the last twelve months’ gross revenue. This statistic assumes that the practice is healthy and profitable. This excludes sales where there is a more urgent need to sell (such as when a dentist is facing health problems, limited capacity, or even death).

Again, there are as many variables as there are practices. From sale-to-sale, the structure of the sale can range from an estate sale, where the departing dentist sells off parts of the practice (equipment, patient lists, etc.) to total sale of the entire practice (building, equipment, staff, the works). There are also agreements in between. For example, sometimes a younger dentist comes on as an associate and then buys the practice after working there for a few years. Having an NAPB dental practice broker with experience with all these wide-ranging scenarios can help you measure the visible components with the less visible components.

I want to focus on the less visible aspects of valuing a dental practice. Visit the location and trust your intuition. Sometimes, what may appear to be a dilapidated practice may actually be a real “diamond in the rough.” While the equipment may not be sparkly and new or the furniture is outdated, the patient roster spans generations. In this instance, you can always update the equipment and furniture. Your dental practice broker can provide a dental practice valuation to provide you with accurate numbers. However, many times a practice like this one is a great buy. I would argue that the existing patient relationships offer the greatest guarantee of the most financial return.

Because of the nature of this intangible value, I also find it is advisable to work with your dental practice broker to get a letter of recommendation from the seller. As part of the deal, have the seller agree to introduce you and endorse you to their current patient roster.

This is your livelihood; therefore do your homework. Work with a dental transition broker and examine the hard facts about the practice. And then weigh those less visible components when you are making the dental practice purchase.

Consult with a local dental practice broker today as you embark on this exciting next step.


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Transparency & Regular Updates: Critical for your Dental Practice Transition

It may sound obvious, but establishing and maintaining a healthy rapport with a prospective buyer is a great way to keep tensions low when selling your dental practice. An NAPB dental practice broker is your greatest collaborator because they can advise you about best practices throughout the process.

Most dental practice brokers will facilitate a sit-down meeting with both the prospective buyer and seller. This is a great time to get to know each other and share details about the practice that may be relevant. The prospective buyer also has an opportunity to ask questions about the dental practice transition. This is a more informal meeting with a get-to-know you kind of vibe. This isn’t the time to go over the dental practice valuation or the specifics of the contracts. They can be figured out with your dental practice broker once the prospective buyer decides that this is the right practice for them.

I’ve found that when the seller invests some time in getting to know the buyer, it can really streamline the selling of the dental practice. It provides an excellent forum for both parties to consider whether their individual objectives can be met with the sale. It’s truly wonderful to attend a closing when it’s clear that both the departing dentist and the new practice owner are thrilled with the sale and purchase respectively.

I encourage additional meetings (beyond the initial meet-and-greet) between the prospective buyer and seller. Again, the purpose of these meetings is not to discuss specifics of the deal but to share more intangible aspects of the practice such as the following:

  1. What is the current dentist’s work style?
  2. How about their bedside manner? Are they jovial or familiar with patients or more formal and all about business?
  3. What about their strategies with difficult patients? Do they handle things themselves or do they involve an office manager or other staff member?
  4. What types of patients are currently being served by the practice?

In other words, the existing dentist can illuminate the less tangible characteristics of the dental practice.  This approach is in everyone’s best interest. Then, the buyer knows what they are purchasing and signing on (sometimes for the next decade or three). It also provided the seller with one last opportunity to impart all that they’ve learned by being in this particular practice.

Getting to know your prospective buyer on a more human level is a good way to round out the experience of selling a dental practice.  It certainly has a positive influence on a successful dental practice transition. Get in touch with your local dental practice broker today to learn more about the process.


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