You probably already know that listing a dental practice for sale takes time and planning. But another crucial aspect of any successful dental practice transition is assembling a team of experts. If you’re considering selling your practice in the next five years the first thing you need to do is find a qualified dental CPA. A dental CPA will provide you with invaluable expertise in the financial aspects of your practice’s transition, such as business valuations and asset allocation. To learn more about the importance of a qualified dental CPA we spoke to Matt Howard of Blue & Co..
Matt Howard is not only a dental CPA, he is also an accredited business valuator, and certified valuation analyst for Blue & Co.. The team at DDSmatch Southwest uses Blue & Co. to provide unbiased, third-party business valuations. Finding your practice’s true market value is more than just looking at the value of the real estate or yearly profits. The experts at Blue & Co. look at each practice from an industry perspective, determine what the practice is worth, and help the buyer and seller understand the fair market value.
If you’re planning to put your dental practice for sale you need to understand the importance of hiring an experienced dental CPA. Below, Matt explains the key services a dental CPA can provide.
What is Business Valuation?
Before you list your dental practice on the market you need to know its fair market value. A dental CPA will meet with you to help you understand what goes into determining that value. Blue & Co. provides sellers with a 70-page business valuation document detailing every financial aspect of your practice.
In order to get a true picture of your practice’s value a business valuator gathers financial data and asks specific questions about your practice’s performance. For example, if a certain expense jumped 10% from one year to the next they will try to understand why, and what effect it had on the practice. After collecting financial data and evaluating it they will enter it into their model.
Your Blue & Co. dental CPA will review the data they collected and create a draft report to discuss with you as you prepare to put your dental practice for sale. The draft report is used as a guide to discuss the different aspects of your practice’s business valuation. Your dental CPA will review the report with you to help you understand variables such as market factors, then give you an opportunity to provide additional input. After reviewing the report and incorporating seller input the dental CPA creates a final version to be presented to the buyer.
The business valuation report is intended to reflect both the true market value of your practice, and how its resources are being used. Some business owners are surprised to learn these two factors are not often the same thing. Matt explains:
“The biggest noise in [the business valuation of a] . . . dental practice would be the owner’s noise. And what I mean by that is anything that’s inside the practice that is not necessarily operational, or is basically something that the owner has decided to do at the practice that doesn’t exactly reflect the operations of the practice . . .
“A lot of times, a seller will own the building, and in owning the building, they’ll pay themselves a leased rate for that building. And sometimes that isn’t a market rate. Sometimes it’s a little bit above, sometimes it’s a little bit lower. And so our job in this process is to really help really work through the practice financials, the historical financial statements, and just basically help sanitize or normalize the numbers as we see them [so] the true operations of the practice are reflected.”
When to Start Preparing Your Dental Practice for Sale
How long before listing your dental practice do you need to start preparing it for sale? The short answer is three to five years. The most important thing for selling doctors to keep in mind is how to line up the timing of the sale and slowing down their practice.
Oftentimes a selling doctor starts slowing down production before putting their practice for sale, typically because they are ready for retirement and want to ease into it. While there is nothing wrong with wanting to slow down your pace, you need to consider how this will affect your practice’s value. Slowing down your practice will decrease your revenue stream making it look like your practice is underperforming.
While your business still has the potential to ramp up production, a buyer’s lending bank may not know that. When a downturn like this appears in a business valuation lenders may look at it negatively. According to Matt, banks are looking for “a very mature practice that’s either consistently growing by inflation, or at least steady in the collection perspective.”
You can probably see now why you should start planning to put your dental practice for sale at least five years before you make the transition. You have spent your career building a successful practice and want to reap the benefits of your labor. As you prepare to wind down your career plan to keep up your current pace until after the valuation in order to maximize your practice’s value.
Not Ready to Sell? Consider Bringing on a Dental Associate
A busy practice is a sign that you’re doing something right, but it can also feel overwhelming. Many doctors who have built successful practices aren’t ready to sell, but still find themselves wanting to slow down. In this case it is a good idea to bring on a dental associate. A dental associate can increase collections and allow the owner-doctor to decrease their workload. They can even plan to take over the practice when the owner-doctor decides to put their dental practice for sale. However, your practice must be equipped to take on an associate. Determining whether your practice is ready is complicated, and unfortunately many doctors get this wrong.
Matt Howard explains, “Every practice has a limited amount of resources, of ops, of time for the staff to not hit overtime. So there’s a lot of variables at play here. Typically, we like to see over a $1.2 million collection practice in general. That way that there’s plenty of room for an associate to come in, inherit some of that revenue stream, as in, hopefully the seller wants to back off a bit and transfer some of their patient base over to the associate.”
For dental practice owners, bringing on a dental associate will bring several benefits when they decide to sell. A dental associate will not only serve your current patient base, but also expand the practice and increase its value, which is an important factor for dentists putting their dental practice for sale. For example, a dentist who is booked three months out may take on an associate to reduce patient wait time. The dental associate keeps patient satisfaction and retention high, while also increasing the practice’s value by bringing on more patients.
Dental associateships are also beneficial to the associates themselves. By joining a mature practice the associate is able to earn money right from the start. They do not have the pressure of building a new business on their own, and instead can focus on supporting your patient load.
When you decide to bring on a dental associate you need to determine how you will pay them. The typical method of taking on an associate is to provide guaranteed earnings for the first few months, up to the first year. After that the associate is moved into a production or collection-based compensation model. Dental associates are generally younger doctors in their first few years out of dental school with student loans to pay back, thus their income will have to cover their debt and living expenses.
Whether you are planning to put your dental practice for sale soon or you are simply bringing on an associate to help expand your practice, you need to have a formula in place that makes financial sense for your practice and the associate. Blue & Co. has a program called Associate IQ. to help dentists considering taking on an associate. Matt Howard explains:
“[We] systematically go through the practice. We have about ten different areas that we look at to make sure that it makes sense for the practice to bring this on. Does it make sense from the owner’s side, and does it make sense from the associate’s side?
“Some things we’ll look at, is if you only have three ops, and you want to bring in two dentists a day, that doesn’t make a lot of sense. So after looking at a bunch of these different variables and intricacies of the practice, we will come up with basically a quotient of how you rate on a scale of zero to 100 for being a good candidate for having an associate.”
Just like putting your dental practice for sale, it is important not to rush into bringing on a dental associate. Carefully consider the implications for you and your practice should you bring on an associate. After a while the dental associate may leave the practice, and the owner-doctor is left with mounting expenses, a heavy work-load, and none of the benefits the associate brought.
If you want to expand your practice, or simply slow down your own workload, bringing on a dental associate is a great way to do that. However, it is imperative that you consult an experienced dental CPA before you take any further steps. A dental CPA, along with a team of transition experts, will look at your practice and help you consider both the long term and short term implications of bringing on an associate.
Do Practice Upgrades Help Valuation?
A question we receive a lot from selling doctors is: will practice upgrades boost value? While you should make some upgrades to make your practice more attractive to buyers, most upgrades won’t pay off when you put your dental practice for sale. Matt explains the nuances:
“If you’ve still got the shag carpet in the practice, that probably needs to go away before you start marketing it. So those types of considerations will bring it up to standard of care and that could make it more valuable.
“However, you’re probably not going to get a one-for-one payback on your investment. So my end-all, be-all recommendation is, five years before the practice sale, unless you’re really making your practice digital or doing something that’s bringing it up to standard of care, any other significant remodels at that point would probably not be a complete one for one return on your money.”
As Matt touches on, one exception is making your practice digital. It is important to note that many younger doctors were trained on newer equipment and do not know how to use older equipment. Rather than learn a new system a younger doctor is more likely to pass up an out-of-date practice when they are looking to buy.
Asset Allocation When Putting Your Dental Practice for Sale
A dental practice transition, as Matt puts it, is “not just the price, it’s the overall deal.” He continues that, “the million dollar price is great and all. However, it’s not about what the price is, it’s about what you keep. And obviously what I’m referring to here is taxation.”
During a sale everything will be allocated as either an asset or as goodwill. Tangible assets are taxed as normal income while intangible assets are taxed at a capital gains rate. From the seller’s perspective, the more you can allocate to goodwill, the better, because the capital gains rate is more favorable.
The issue of asset allocation is typically more important to the buyer than the seller. However, everything in the sale, for the buyer, can be depreciated over time. This means that, in the long run, asset allocation does not have as great an impact on the buyer. On the other hand, the seller takes a one-time hit when they must pay their tax bill.
The good news for dentists putting their dental practice for sale is that asset allocation is mostly an issue of negotiation. Buyer and seller must agree on a mutually beneficial arrangement. This is one more area experienced dental CPAs and lawyers can benefit you. Your team of experts will ensure your interests are represented, and no details are overlooked when agreeing on the value of your practice.
DDSmatch Southwest Can Help You Transition Your Dental Practice
If you’re considering listing your dental practice in Texas or New Mexico the team at DDSmatch Southwest is ready to serve as your transition specialists. Our experts are more than just dental practice brokers. By using our Trusted Transition Process we ensure you, your staff, and your patients have a successful transition. We work hard to find a buyer who not only has the skillset to take over your practice, but also the personality and drive to carry on your legacy.
At DDSmatch Southwest we focus on helping each individual meet their goals, while avoiding common, costly mistakes. Contact our team today to learn more about reaching your dental practice transition goals.