When we are helping our clients sell a dental practice, questions often arise after several buyers have looked at the practice information, maybe even visited the practice, but decided not to make an offer. While this can be frustrating for our sellers, we encourage them to remember that it can take time and effort to find a willing and able buyer for their practice.
Our preferred strategy to maximize practice value and reduce the stress and time required to sell a dental practice involves addressing common issues that buyers have before the practice is placed on the market.
In this two-part article, we will review the practice attributes that today’s buyers are paying close attention to – their “Hot Buttons”- as well as our recommendations on how to address those Hot Button issues ahead of time so that the decision to sell a dental practice results in a smooth and successful transition.
Hot Button #1: Asking Price. Today’s buyers are sophisticated and very well informed about the market value of dental practices in their area. If the practice is initially priced well above its true market value, it will take much longer to sell. Even if you find a buyer who is willing to offer more than the market value, overpriced practices will ultimately end up selling near their true market value once the buyer’s advisors and practice lenders begin to weigh in on the practice purchase price.
Solution: Set an asking price for the practice within the normal range of market values in the area. This is accomplished by conducting a thorough analysis of comparable sales in the local market. Be sure to engage an experienced, local broker to accomplish this task.
Hot Button #2: Practice Location. We find that the majority of buyers are looking to purchase a practice primarily in the urban/suburban areas of Texas. Therefore, it usually takes longer to sell a dental practice in a rural area. In addition, most buyers prefer a retail-type space with good visibility, although an attractive professional building location is also a viable option.
Solution: Utilize a long-term, strategic analysis of your current location. If the area is “going downhill” or the building in which the practice is located does not have the type and volume of tenants it once did, consider the costs vs. benefits of relocating your practice to a better area or a different type of building. If you are 7 to 10 years away from transitioning your practice, the benefits and potential gain in practice value can often justify the investment required to relocate.
NOTE: If your practice is in a rural area, the other “Hot Buttons” discussed in this article become even more important to buyers.
Hot Button #3: Equipment and Aesthetic Appearance/Cleanliness. Because most buyers have been practicing for less than 5 years, they would prefer to utilize newer equipment and digital technologies in their practices. The practices that have digital radiography and chair-side computers tend to sell quicker and at a higher price than their counterparts.
Also, first impressions are important, so practices that do not have a positive “curb appeal” when buyers walk in the door for the first time can lose value and take longer to sell.
Solution: Just as with your location analysis, it is imperative to have a long-term plan for keeping your equipment and facility up to date. The more time you have until the practice sale, the easier it will be to garner a sufficient return on investment from purchasing new equipment. We recommend that you upgrade your equipment 3 to 5 years prior to selling your practice.
In regard to aesthetics, we again recommend updating your office décor and finishes 3 to 5 years before the sale to initiate a positive response from potential buyers. Hiring an interior designer or remodeling the practice can enhance practice value and marketability.
Hot Button #4: Practice Cash Flow. Most young buyers are looking for practices that generate sufficient net cash flow (after operating expenses) to cover their personal living expense needs, which can be substantial considering that many potential buyers have student loan debt in excess of $200,000. Additionally, the ability for a buyer to obtain financing for the practice purchase is heavily tied to the historical cash flow of the practice.
Solution: Cash flow is related to both expense control and revenue enhancement. Start by ensuring that your major expense categories (staff payroll, dental supplies, and lab fees) are within industry norms. Next, make sure that you are doing everything possible to enhance practice revenue, increase case acceptance, attract new patients, and retain your existing patience base.
Hot Button #5: Type of Patient Base. When we sell a dental practice, our experience has been that the majority of buyers are looking to acquire a practice with a fee for service and/or PPO patient base. DMO patient bases are definitely waning in popularity and, with the recent changes to Medicaid reimbursement in Texas, a patient base with a significant Medicaid component may be viewed negatively by some buyers.
Solution: With the help of a practice management or insurance consultant, conduct an analysis of the insurance plans that you currently accept along with those that are prevalent in your market area to determine if it is worthwhile to drop some plans and possibly add others. If handled properly, these changes may help increase new patient flow, decrease practice overhead, and make your practice more valuable and marketable to potential buyers.
If Medicaid accounts for the majority of your patient base, you have likely already experienced a significant decrease in revenue and should consider developing a long-term strategic plan to build a fee for service and/or PPO patient base. A location/demographic analysis will be essential to identifying potential opportunities in your area.
Hot Button #6: Patient Flow. Active patient count and new patient flow are extremely important to buyers in evaluating the health and goodwill of a practice. We have often heard that, on average, patients switch dentists every seven years. Therefore, an easy way to determine if your patient base is growing or declining is to divide your number of active patients (seen in the past 24 months) by seven and compare the result to the number of new patients you have seen in the past year. If the number of active patients leaving your practice each year is larger than the number of annual new patients, then your patient base is shrinking and may be cause for concern.
Solution: Conduct a periodic analysis of your active and new patient counts to evaluate the health of your practice and identify trends that may need to be corrected. Enhancing the patient experience and maintaining an effective recall system can ensure maximize patient retention, while implementing an internal marketing strategy (asking for referrals from existing patients) and an effective external marketing strategy (such as a website or direct mail) can improve new patient flow. Hiring a practice management consultant on a periodic basis can help you and your team to stay on track in these areas.
Hot Button #7: Upside Potential. When an acquisition opportunity provides the buyer with the potential to increase revenue through making minor changes in the practice, the buyer will typically be more inclined to offer full market value for the office. Retaining services that are being referred to specialists, increasing operating days or hours, and implementing relatively simple internal or external marketing strategies are all attractive ways for a buyer to increase revenues and patient flow.
Solution: While you should take advantage of the revenue potential of your practice prior to the sale, be sure to identify and quantify any opportunities that you have not pursued to your practice broker and potential buyers.
By understanding the factors that influence a potential buyer’s perception of value, making the changes necessary to maximize practice value and marketability, and planning ahead, practice owners can ensure that they will be in a great position when the time comes to sell their most valuable asset.
If you are planning to sell a dental practice in the future and would like our help with evaluating the current value of your practice and suggesting ways to increase value, feel free to contact McLerran & Associates by phone or email.