Top 3 Tips When Selling a Practice
Updated: May 13, 2019
Selling a dental practice doesn’t have to be stressful. Here are the top 3 tips to ensure a successful sale.
A seller’s most successful approach in their practice sale is to enlist an experienced and trusted advisory team including a practice broker, CPA and attorney who all have experience working with dentists and practice transitions. This team will protect your confidentiality from curiosity seekers and present your practice in its best, but honest light. Your advisory team will guide you through the entire selling process, from a practice valuation to the final closing. They will also offer key advice about how and where to market for maximum exposure to potential buyers, how to structure the sale for maximum tax savings, and how to minimize the risks of post-sale lawsuits.
The second important key to a successful sale is understanding how your practice is valued.
There are three financial methodologies utilized to determine practice value:
Asset Method – Calculates value by adding the tangible assets of your practice (office equipment and furniture, lab and operatory equipment) to the intangible assets also know as the goodwill (active patients, staff, categories of dentistry being done, location, marketing, hygiene, new patients, facility, etc). A multiplier is then applied to calculate the value using this method.
Income Method – Takes a deep dive into the finances
and profitability of the practice, taking into account three years of tax returns, Income Statements, Balance Sheets, production and collection reports and the categories of dentistry being done that create the economic engine of the practice. A capitalization rate is applied as part of the analysis, along with an in-depth cash flow report to understand the potential for future profitability.
Market Method – Compares similar practices in the geographic region that have sold. A complete and thorough practice valuation is vital to understand how your practice stacks up to those that have sold. A trusted broker who is working in the market has the knowledge and expertise to advise you in this area.
A third important tip, is to understand how slowing down can affect your practice profitability and value. Every dentist I have talked to over 25 years has told me that the sale of their practice is an important part of their retirement plan. Before reaching the point of listing their practice for sale, many dentists have cut back and slowed down in preparation for retirement without understanding what it might actually cost them to do so.
On the surface, it seems that a practice with 65 percent overhead that reduces its income $100,000 per year would result in a $35,000 loss in income. Digging a little deeper, the only expenses on the last $100,000 were basically clinical supplies and lab fees, which together usually account for about 15 percent. Add another 10 percent savings for salary cutbacks, (Which by the way, when many dentists slow down in production they don't also reduce the appropriate and corresponding amount in staff labor costs. This leads to an even worse case scenario on the practice profitability, but that's a discussion for another time) and the total incremental expense is 25 percent on the last $100,000 of income. In actuality reducing the practice income by $100,000 only results in an expense savings of 25 percent or $25,000, but it has an unexpected consequence of a loss in owner net income of 75 percent or $75,000. If this practice was listed for sale at a price value of 75 percent of its collections, a reduction of $100,000 would result in a lowering of its price by $75,000.
To understand, let's take a look at the true structure of the economics of a dental practice, that is that the overhead from the first dollar earned up to the break-even point is 100 percent. After the break-even point, overhead expense is approximately 25 percent of the incremental earnings. While the blended rate may be 65 percent, it doesn't paint an accurate picture in understanding the cost of slowing down.
It's important to understand when considering retirement that the sale proceeds of a practice will approximately equal the income a dentist could earn for the next three years. With this understanding and continuing to practice, the dentist is working those next three years for free. Hopefully this helps to make a more informed decision about slowing down and weighing the true costs when determining the advantages of having extra "free" time headed toward retirement.
Grant Gerke is the founder and president of Mountain Top Practice Transitions. He has spent 25 years in the dental industry and personally services the Western United States. He is located in Portland, OR and can be reached at (503)-701-6697 or write to him: firstname.lastname@example.org