Given the significant changes that have occurred in the marketplace since the COVID-19 pandemic, it is imperative that you put a great deal of thought into when and how you would like the transition of ownership to occur. The following article provides some insight into the key considerations you should take into account when planning your practice transition.
Start with WHY?
Any decision of this magnitude should start with clearly defining WHY you are considering selling and the goals that you are looking to accomplish. Here are the most common reasons that dental practice owners sell their offices:
- Retirement or Relocation
- Achieve Financial Goals
- Decrease Work Schedule and/or Production Responsibilities
- Reduce Burden of Management
- Fuel Practice Growth & Development
- Attain a Better Work/Life Balance
- Death or Disability
Choose a Transition Strategy That Meets Your Individual Needs
Once you have defined why you are selling and what you are looking to accomplish as a result of the sale, it’s time to choose a transition strategy that meets your unique needs. There are countless ways to sell/transition a dental practice, but here are the top proven transition strategies that we utilize to help our clients achieve their goals:
- Walk Away Sale / Short Term Transition – Sell 100% of the practice (typically to a private buyer). The seller either walks away at closing or provides the buyer with transition assistance for a short period of time post-closing (typically 4-6 weeks).
- Sell and Work Back – Sell 100% of the practice to a private buyer or DSO. The seller continues working in the practice full-time or part-time for a pre-determined timeframe following closing.
- Associate to Purchase (Phased Transition) – Sell 100% of the practice to a private buyer in 1-2 years at a pre-determined purchase price or pre-determined formula for calculating the purchase price at closing. The buyer works as a full-time or part-time associate in the office for 1-2 years prior to the transition of ownership. This transition strategy typically works well in the case of a larger practice (revenue of $800,000+ and 5+ ops) where the seller desires to cut back his/her work schedule but retain ownership of the practice for a couple of years prior to the sale.
- Sell to a DSO – Sell 50-100% of the practice to a DSO buyer. Selling to a DSO buyer can result in the seller receiving a significantly higher value for the practice as compared to selling to a private buyer. However, the premium paid by a DSO usually comes with some conditions that must be met in order for the seller to receive the full purchase price. In most cases, the seller will be required to continue working in the office for 2+ years following the sale. The practice may also have to maintain a certain revenue or EBITDA level post-closing for the full sales price to be earned by the seller. Selling to a DSO can accomplish several objectives that sellers often desire to achieve via the sale of their practice, including fulfilling financial goals, the ability to continue working in the office and earning an income indefinitely following the sale, and substantially reducing the
burden of management. By retaining partial ownership in their offices, sellers may also have the ability to receive ongoing net income distributions and participate in future recapitalization events (which can dramatically increase the overall practice value).
- Partnership – Sell a partial interest in the practice to a private buyer. Entering into a partnership can potentially allow a seller to accomplish his/her financial goals while providing flexibility in regards to the seller’s work schedule and decreasing the seller’s management burden. However, partnerships require a great deal of due diligence to determine if the personality and practice philosophy of the partners are compatible. It also requires a detailed partnership agreement that clearly defines how doctor compensation and net income distributions will be calculated and how situations involving partner disagreements, buy-in, and buy-outs, death, disability, etc. will be handled.
Choosing and executing the transition strategy that best meets your individual needs is key to ensuring a successful sale and smooth transition of ownership for all parties involved.
For many doctors, their dental practice is one of their most valuable assets and the proceeds from the sale of their office will be utilized to fund a significant portion of their retirement. Therefore, it is crucial for you to understand the key factors that influence the value and marketability of your practice to ensure that you are in the position to maximize the value of your office at the point of sale. There are a number of factors that can significantly influence practice value, including the type of buyer/transition (individual doctor versus DSO), revenue levels and trends, profitability (net cash flow vs. EBITDA), type of patient base, type of dentistry, location (urban vs. rural, high visibility vs. low visibility), quality and age of equipment, curb appeal, etc.
While the historical average sales price of a dental practice on a national perspective is approximately 67% of the most recent year’s revenue, over the past year we have sold practices for as low as 40% of revenue and as high as 250% of revenue based upon the type of transition strategy utilized and the unique attributes of each office. The first step in the transition process is to obtain a practice valuation from a local, reputable practice broker to determine the current market value of your practice and chart a path to reaching your financial goals. It is also important to remember that selling your office is not synonymous with retiring, as there may be opportunities for you to continue generating personal income following the sale by working as an associate in your office, working as an associate outside of your non-compete radius, receiving net income distributions (DSO sale with a retained ownership interest), or participating in future re-capitalization events (DSO sale with a retained ownership interest). Once you have determined that you are financially prepared to sell your practice, it’s time to move on to consider the emotional implications of the sale.
We have found that the emotional process of selling a practice often plays a more significant role than the financial implications. For many practice owners, it is extremely difficult to consider selling their practice due to the emotional ties the doctor has to their patient base, staff, and the business they have spent their entire career building. These emotions can be even more intense for those doctors who do not have other interests or hobbies outside of practicing dentistry. Therefore, it’s important to ask yourself these questions before making the decision to sell:
- How strong is my emotional connection to my practice?
- What interests or hobbies do I have to keep me busy following the sale of my practice?
- Am I ready to give up control of my practice?
- If you plan to continue working in your office following the sale, are you willing to adopt an “associate mentality” and be accepting of change?
It is also worth mentioning that the emotional implications associated with the sale of your practice will increase once you accept an offer and begin navigating the closing process. By asking yourself the above questions and dealing with these feelings prior to putting your practice on the market, you will be in the position to minimize your anxiety as you navigate the transition process.
The Importance of Planning Ahead
As practice brokers, we are often contacted by practice owners on the day they are ready to sell. While we are certainly prepared to help dentists who find themselves in this position, it is far from ideal. By waiting until the last minute to plan their transition, the doctor’s options are relatively limited in regards to the type of transition strategy he/she can utilize to sell the practice. As is often the case, the doctor has also taken their foot off the gas in recent years, resulting in a significant decline in revenue, profitability, and practice value. To avoid these mistakes, we encourage you to develop a relationship with a local, reputable practice broker well in advance (3+ years) of your practice transition. In doing so, you will gain valuable insight regarding the current value of your practice and the key factors that impact practice value and marketability. This information will also provide you with sufficient time to develop a customized transition strategy to meet your individual needs, make changes to your office that will enhance practice value, and avoid mistakes that may negatively impact value.
Given the significant changes that have occurred in the marketplace over the past year as a result of the COVID-19 pandemic, it is more important than ever for potential sellers to plan ahead, explore their options, understand the factors that influence value, and employ the services of an experienced practice broker to serve as their advocate and guide them through the process. We encourage you to contact McLerran & Associates to schedule a free, confidential consultation to discuss your practice and how we can help accomplish your goals