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Buyer Hot Buttons

As a seller of a dental practice, it is important to understand the perspective and motivation of the party on the opposite end of the transaction … the buyer. At McLerran & Associates, we focus on educating our clients regarding the critical factors that influence practice value and marketability (from a buyer’s viewpoint). When marketing our practices, one of the strategies we utilize to maximize practice value, make the process more predictable/efficient, and reduce the stress and time required to reach closing, is to highlight the positive attributes of the practice while also getting out in front of any issues that could negatively impact buyer sentiment and the value and marketability of the practice. As important as it is to accentuate the positive attributes of the practice, being transparent and comprehensive in the presentation of practice information/financials is the key to establishing a trusting relationship with prospective buyers and protecting the goodwill between the parties.

In this article, we will review the key practice attributes that today’s buyers are paying close attention to and make recommendations on how to address these “hot buttons” to make your practice as valuable and marketable as possible.

Hot Button #1:  Cash Flow. CASH FLOW IS KING from the perspective of both private and DSO buyers. Most private buyers are looking for practices that generate sufficient net cash flow (revenue minus operating expenses) to cover their personal living expense needs, which can be substantial considering that many potential buyers have student loan debt of $250,000 or more.   Additionally, the ability for a buyer to obtain financing for the practice purchase is heavily tied to the historical net cash flow of the practice. While most practices will sell for 70-90% of annual revenue in the private buyer world, profitability is the most important factor determining where your practice’s value will fall within that range. From the perspective of DSO buyers, EBITDA (revenue minus operating expenses and doctor compensation) is the driving force behind valuation. Once the EBITDA of your practice has been determined, DSO buyers will apply a multiple to that EBITDA (typically in the range of 5-7 X) to arrive at a valuation.  The level of EBITDA, revenue level, type of patient base, quality of equipment/facility, location, and several other factors (including the owner doctor’s availability to continue working in the office post-closing) will determine where the EBITDA multiple for your practice will fall within that range.

Solution:  Cash flow is related to both maximizing revenue and controlling expenses. Start by ensuring that your major expense categories (staff salaries, dental supplies, and lab fees) are within industry norms. Next, make sure that you are doing everything possible to enhance practice revenue, realize untapped potential, increase case acceptance, attract new patients, and retain your existing patient base.

Hot Button #2:  Asking Price. Today’s buyers, both individual doctors, and DSOs are sophisticated and well-informed about the market value of dental practices. Therefore, it is critical to set the asking price of your practice at a realistic and justifiable number. If the practice is initially priced significantly above its true market value, it will lead potential candidates to believe the seller has unrealistic expectations and prevent them from inquiring further. Most buyers are respectful of a seller’s time and emotional attachment to their practice, leading them to refrain from pursuing opportunities they feel are priced inappropriately rather than making what the seller may consider a “low-ball” offer and taking the risk of insulting the seller and damaging the relationship with everyone involved in the transaction. If the process starts with a rigorous negotiation, that mentality will likely persist throughout the process and permeate every aspect of the transaction. Even if you find a buyer who is willing to offer more than the market value, overpriced practices ultimately end up selling near their true market value once the buyer’s lender and/or advisors weigh in on the situation. From a DSO perspective, most buyers prefer acquiring offices with high visibility and in geographic locations within 60 miles of a major metropolitan area.

Solution:  Engage an experienced practice broker who has your best interest at heart. Start with a formal practice valuation and get educated on the factors that drive value along with your practice’s positive and negative attributes. If a broker is trying to earn your business by telling you only what you want to hear, be prepared for them to negotiate you down on the price later in the process (when your practice is not receiving the level of buyer interest it deserves).  At McLerran & Associates, we pride ourselves on selling our listings to well-qualified buyers in a timely manner at the initial asking price (sometimes above the asking price in the case of a DSO sale).

Hot Button #3:  Practice Location. With an increase in the number of practice start-ups and the unbridled growth of DSOs over the past 10 years, the dental landscape has become more competitive. As a result, dental practice buyers are paying more attention than ever to demographics, visibility, and accessibility when considering acquisition opportunities. Most buyers prefer a highly visible/accessible location and view the ability to own the real estate as a huge selling point.

Another important factor surrounding the locale is the size of the community in which the practice is located. While tertiary markets often have less competition and lower overhead, we have found that buyer demand is highest in urban and suburban areas. Therefore, it usually takes more time to sell a dental practice located in a rural area market and the practice may need to be priced more competitively to attract buyers to those markets.

Solution:  Take an honest assessment of your current location. If the local area is “going downhill” or the building in which the practice is located does not have good visibility or the quality/volume of tenants has diminished over time, consider the cost vs. benefit of relocating your practice. If you are 7 to 10 years away from a practice sale, the benefits and potential gain in practice value/marketability can often justify the investment required to relocate.

If you own the real estate occupied by your practice, being flexible in offering buyers the opportunity to purchase or lease the property will lead to increased buyer demand. While it is ultimately the seller’s choice how they want to approach this issue, it is critical to clearly define how the real estate will be handled before taking the practice to market.

Hot Button #4:  Facility & Equipment. Most private buyers have been practicing for less than 10 years and were trained on state-of-the-art equipment in dental school, which has led to an expectation that the office they acquire will have updated technology (good practice management software, digital radiography, paperless charts, etc.). Also, many buyers now aspire to have a multi-doctor office, so having sufficient space available to accommodate 2 doctors and 2+ hygienists is a major selling point. While offices with 6+ operatories will garner the attention of both private and DSO buyers, practices with less than 4 operatories have become increasingly difficult to sell.

Curb appeal is also extremely valuable in making a solid first impression on potential buyers (and patients). If the office is not clean/organized or the finishes (flooring, paint, countertops, etc.) have not been updated in quite some time, that shortcoming could lead to buyers developing a negative perception regarding the quality of dentistry and/or other aspects of the practice.

Solution:  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 justify the return on investment from purchasing new equipment and making tenant improvements. We recommend that you upgrade your equipment 3 to 5 years before selling your practice if you have not done so already. However, it is important that you refrain from making a significant investment right before your practice sale and/or taking on a substantial amount of debt for items that do not increase your productivity, patient experience/case acceptance, and practice value/marketability.  A practice valuation can provide you valuable insight regarding how your facility compares to that of your peers and where your dollars can best be spent to generate the highest ROI.

Regarding the aesthetic appearance of your office, focusing on low cost, high impact changes are a great place to start … a new coat of paint, flooring, and furnishings, and the help of a savvy interior decorator can go a long way in increasing the curb appeal and marketability of your practice.

Hot Button #5:  Active Patients & New 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 new patients, then your patient base is shrinking and may be cause for concern.

Solution:  Conduct 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 maximum patient retention while implementing an internal marketing strategy (asking for referrals from existing patients) and an effective external marketing strategy (website, online reviews, etc.) can improve new patient flow. Hiring a practice management consultant periodically can help you and your team to stay on track in these areas.

Hot Button #6:  Upside Potential. When an acquisition opportunity provides potential buyers with the potential to increase revenue through making minor changes post-closing, buyers will typically be more inclined to offer full market value for the office. Retaining services that are being referred to specialists, adding providers, increasing operating days/hours, and implementing relatively simple internal or external marketing strategies are all attractive ways for buyers to increase revenue and patient flow. Some buyers (multi-location private practice owners and DSO’s) also have economies of scale and infrastructure/systems in their favor, which can lead to increased productivity and decreased overhead costs. The possibility for future growth is a motivating factor amongst all buyers in the marketplace.

Solution:  While you should take advantage of the revenue potential of your practice before the sale, be sure to identify and quantify any opportunities that you have not pursued to your practice broker and potential buyers.

Understanding the factors that influence a buyer’s perception of practice value and making changes for the betterment of your office in advance of a sale, will ensure that you are in the position to maximize the value of your practice.

 

 

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