Selling a Dental Practice

How DSOs Have Changed the Market for Selling a Dental Practice

Love them or hate them, dental service organizations (DSOs) take up a lot of the conversation when it comes to selling a dental practice. In fact, there is so much ink being spilled over DSOs, you might be surprised that they are not quite as prevalent as you think. Regardless, they are having a significant impact on dental associate employment and dental practice transitions across the country. If you are considering a dental practice transition, you may need to consider a DSO as an option, but, if you don’t think that’s right for you, there are still plenty of private buyers out there. Here we discuss some of the things that you’ll need to think about if you are considering selling your dental practice to a DSO.

How Common are DSOs?

Not as common as you might think. According to DSO News, only about 16-20% of practices in the U.S. are “consolidated practices.” However, if you compare the dental industry to the larger medical industry, where consolidation of physician practices has been going on for quite a bit longer than DSOs have been consolidating dental practices, you can see where this might be headed. According to the American Medical Association, in 2016 the medical industry in the U.S. hit a new benchmark in which less than half of physicians owned their own practice.  

This increasing trend is also shown in dentist employment statistics. As of 2017, the ADA reported that, overall, only 7.4% of all doctors were affiliated with a DSO. However, when you look at younger dentists, the number more than doubles to 16.3% among doctors aged 21-34. This disproportion between the number of new doctors joining DSOs and the number of doctors overall indicate a trend toward DSOs having an increasing presence in the field.

Anecdotally, however, there is evidence that young doctors associate with a DSO but don’t necessarily stay and work long-term in that employment model. After all, a young doctor is looking to get experience quickly and the compensation package offered by a DSO is likely be greater than what they can earn working for a doctor-owned practice. Those higher salaries are going to be attractive to recent grads who have, on average, $261,150 in student loans.

While this is making it harder for doctor-owned practices to attract young dental associates, this doesn’t mean that the younger doctors are necessarily forgoing ownership of their own practices. After all, there are significant financial incentives for owning your own practice. So while DSOs are certainly changing the landscape, they haven’t totally remade it.

Selling a Dental Practice to a DSO May Not Be as Easy as You Think

As with any dental practice transition, the best deal for your practice is going to depend on what you are looking to get out of the practice—whether you want to hand over the keys and walk away with pockets full of cash, whether you want to be rid of the business side of the practice but keep providing patient care for another 20 years, or are somewhere in between.

Because DSOs are have deeper pockets and easier access to financing than most individual buyers, they can often outbid the individual buyers. However, those big offers may not be all cash and can come with a lot of strings attached. No doubt you’ve received numerous emails and postcards urging you to consider joining your practice to a DSO. Note that they often do not say that you will sell your practice and work form the. They say things such as “affiliating you practice” and “partnering” with the DSO. While this indicates something like a legal partnership, it most certainly is not the case. The DSO will own your practice and you will be an employee (although possibly one with stock or stock options).

Also, rumors of high payouts by DSOs can be overstated. First, DSOs are looking for particular kinds of practices. If yours meets their criteria, they may be willing to pay a premium. If not, they may still make an offer, but it might not be as attractive as you would expect. Under those circumstances, you may be better off with an individual buyer.

Second, if you are selling a dental practice with the intention of getting cash at the close and walking away, a DSO is less likely to agree to those terms. A DSO may make an offer that is a combination of cash and stock and will likely want you to stay on for a minimum amount of time (as an employee) to facilitate the transition. They may make a part of what’s being offered dependant upon you being able to meet their production goals. How hands-on or hands-off they will be during the transition will vary. However, to be certain, you will be an employee helping the DSO to remake your practice into what they want it to be. Also, there have been reports of DSOs not being quite as doctor-friendly or flexible as they present themselves (in addition to reports of some questionable patient care practices).

What to Consider when Selling a Dental Practice to a DSO

As stated above, a DSO is unlikely to offer you a premium for your practice in an all cash deal where you collect your payment and go on your merry way. So, if you are considering selling your dental practice to a DSO, here are some things you may have to grapple with.

The sale price that you will be offered can be comprised of a few different parts:

  • Cash at close: this is pretty straightforward— it’s the actual dollar amount put into your hand when the papers and signed and the sale is closed.
  • Earn out: this is money that you might get at the end of a multi-year employment commitment and is based on financial goals set for the practice. If you meet certain goals, you get a certain amount. If you don’t, then you mostly likely won’t get most, or possibly any, of the earn out amount. This allows the DSO to make a higher offer but end up saving some of that cost if your practice fails to perform with sufficient profitability from the DSOs perspective.
  • Equity roll: this is where you have the option to take some of your cash at close and invest it in the DSO’s parent company. This is not always an option. However, when it is, the idea is that the buyer is a successful company that’s good at getting a return on its investments and you may be able to take the proceeds of the sale of a dental practice and turn it into even more money down the road.

The other major aspect to think about is becoming an employee of the DSO. This is definitely something to look at closely and carefully consider if an earn out is part of the deal. Some DSOs will negotiate some terms of employment, some will not. Regardless, you need to look at:

  • Clinical compensation rate: is it based on collections or production? What about lab costs?
  • Overall benefits package: does it include health insurance, malpractice insurance, a retirement savings plan, does the employer match any contributions for retirement, do they pay for continuing education?
  • Non-compete agreement: how big of a geographical area and for how many years? Be sure to have a qualified attorney review the terms.
  • Ownership: are you being bought by a public or private corporation? If you are being offered stock, what are you getting stock in?

Whether selling a dental practice to a DSO is the right choice for you is ultimately dependant upon the goals you have for your practice’s transition. At ddsmatch Southwest, our dental practice transition specialists work with you to help you define those goals and then use those goals to help identify a buyer with the right skill set and personality match to carry on your practice and the legacy you have worked so hard to build, whether it be a DSO or an individual buyer. If you are considering transitioning your practice in the next five years, contact us today for your free, no-obligation Practice Transition Assessment.

Should You Stay On After You Put Your Dental Office for Sale?

A common occurrence in dental practice transitions is where the seller puts a dental office for sale but, for whatever reason, will stay on with the practice after the sale closes. This can happen for a variety of reasons, however, when it’s driven by the selling doctor, it’s often a case where the doctor wants to “sell my dental practice” but isn’t actually ready to retire. These situations can be problematic. Here at ddsmatch Southwest, we believe a good dental practice transition is one where everyone is happy with the outcome. Here are some tips we have about when selling doctors should stay one and what expectations both the buyer and seller should have.

Why Do You Want to Stay in the Practice After the Sale?

The first thing you need to consider is why you want to stay on. If you want to facilitate a smooth and successful transition, that’s great. Having the selling doctor stay in the practice can help with many potentially problematic aspects of the transition.

  1. Staunching the loss of patients. Experience has shown there will be a certain amount of patient attrition in a transition. Having the doctor patients are familiar with can ameliorate patient loss. Additionally, the selling doctor can work on finishing up treatment plans with certain patients where it makes sense to not try and hand the case off to an unfamiliar doctor. However, depending on the patient experience, this may not always work out. A patient may not appreciate that the familiar doctor is still practicing in the office if they are being seen by the unfamiliar doctor.
  2. Easing the transition for the staff. One of the trickiest parts of putting a dental office for sale is quelling fears of the staff. They are concerned about their job security and how their work environment—which is heavily influenced by the personality and management style of the doctor—will change. By having the buying and selling doctors working together during a fixed transition period can alleviate these concerns. The changes will occur gradually and with the cooperation of the selling doctor who can provide insight as to why things are done the way they are. Changes that are implemented are done over time, perhaps with more consideration given to established practices.
  3. Guidance and training for the new doctor. While every transition is different, it is likely that your practice is being bought by a younger, less-seasoned doctor, one who may only have a few years experience out of dental school that has never managed a practice before. Being able to leverage the knowledge of the selling doctor as the buyer finds their footing can be invaluable.

It is important to note, however, that for these goals to be achieved, both doctors must fully accept that, as of the close of the sale, there is a new owner.  That means there is a new boss, and it’s not the selling doctor, who is now an employee. The selling doctor is there to be a resource and support to the buying doctor, not to try and enforce their own way of doing things. Change is coming to the practice. The selling doctor can help to facilitate it, but should not work against it. That’s a battle the selling doctor will lose while alienating the buying doctor, and possibly the staff and patients as well.

Do Not Expect to Have Your Cake and Eat it Too

To be sure, when you put your dental office for sale, the end of that process is that it’s no longer your dental office. Along with control over staff, policies, practices, and other aspects of the practice, you are also losing your claim on the practice earnings.

Ask any dental transition specialist and they can tell you stories about excessive demands that sellers put on buyers to keep drawing on the earnings of the practice for years after the close of the sale. In one instance, a third-generation doctor with a lucrative practice was demanding an eight-year employment contract with a minimum guaranteed salary and a long-term position for her dentist father. Needless to say, that deal did not go through. In another instance, an orthodontist was requesting to stay on with a minimum of 120 days per year at $1,750 per day (working out to at least $210,000 per year). These doctors are not really ready to sell, much less retire. Such requests are unreasonable and you will be hard pressed to find a willing buyer.

Part of the issue with these kinds of onerous demands are that they will unfairly (if not impossibly) tax the resources of the practice. If you put your dental office for sale but demand to stay on with ongoing compensation equal or greater to that of a full-time associate, you are, in effect, adding the financial burden of an employee where there wasn’t one before (unless you are selling to your associate). It’s unlikely that your practice can support that. If it could, you would have already had to add an associate to keep up with they practice’s workload. If you haven’t reached that point, it will be very difficult for the buyer to pay you.

You might look at your books and think there is plenty of money coming in to support your salary at an associate level. While that may very well be true, you may be overlooking the fact that you probably don’t have a dental practice loan or student debt that you have to service. Your buyer most certainly will and they will need those excess earnings to pay for the education and practice they just bought.

Finally, with regard to compensation if you do stay on for a period, a fair amount would be what you would have offered an associate, whether that be base salary, commission, or a combination of the two. It’s unlikely that your practice will be able to afford to pay you at the level that you’re accustomed to. But that is reasonable because you will no longer be the owner, will full rights to all excess profits.

Are You Really Ready to Put Your Dental Office for Sale?

If this discussion is giving you pause, the question you may need to ask is whether you are really ready to put your dental office for sale. Some doctors may be at a stage of life where they feel like retirement should come next but aren’t psychologically prepared for the change—they have something to retire from but nothing to retire to. If this is the case, as you begin the dental transition process, you should consider what you will do once you no longer have an office to come to each day.

Other doctors may be ready to stop seeing patients and start hitting the links every day but perhaps are concerned about whether the proceeds for the sale will really be able to provide for the level of comfort that they’d like. In that case, you should consider staying in your practice as the owner for an additional period of time as you earn and save a little more. Regardless of the circumstances, selling before you are ready, either psychologically or financially, can cause regret that may be easily avoided.

If you aren’t really ready to retire but aren’t necessarily interested in being a manager or sole proprietor anymore, you have a couple of options that can work to your benefit:

  • Buy-in to buy-out: under this model, you would add a partner to your practice with a plan for the new partner to eventually purchase full ownership of the practice. This is a good option if your practice can support another doctor, or if you have a good candidate in another sole proprietor that can bring their own patients with them. Under this model, you can work towards your transition in a way that is comfortable and meets your dental practice goals.
  • Become an associate: if you are not ready to stop treating patients but would be happy to relinquish the responsibilities for managing the practice, this could be a good option. Recognizing that it would likely involve a pay cut, you would have several options. You could sell your practice to another doctor and be an associate in the practice. You could sell to a DSO and remain as an employee in your practice. Or you could sell outright and find an associate position in another practice (you’d have to consider, however, the impact of the non-compete agreement that you’d have to sign as a part of the sale of your dental practice).

ddsmatch Southwest Can Help You Meet Your Dental Transition Goals

If you are considering a dental practice transition in the next five years but are not sure what option is best for you, ddsmatch Southwest can help. We will discuss with you what you think you need to get for your practice to retire the way that you want, how soon you want to retire, and what kind of buyer you are looking for, be it an outright sale, an associate, a partner, or a DSO. Also, we offer a free, no-obligation Practice Transition Assessment to help you determine what will best help you get to where you want to be before you put your dental office for sale. Contact us today to find out what we can do for you.

What About Your Staff? How to Protect Them When Your Dental Practice is for Sale

Most dentists who are putting their dental practice for sale are concerned about what will happen to their staff after the transition. You’ve put your staff together carefully, worked with them closely for years, and developed personal relationships with them. Its right to worry about their well-being. However, you don’t want to let that worry cause you to make a decision that can jeopardize either the practice transition or their jobs. For these reasons, you need to be careful about how they are informed and provided for before, during, and after the transition.

Why the Buyer Wants to Retain Your Staff

Don’t assume the dental practice buyer will want to fire your staff. A prospective buyer most likely has a strong interest in retaining them. After all, your staff have been working in your office, meaning that they know the files, the systems, policies, and procedures, and, most importantly, the patients. A prospective buyer isn’t going to want to disrupt the flow of a smoothly running practice— an important component in what makes your practice successful, and, therefore, a desirable dental practice for sale. A change in doctor is enough change to foist on your patient base. Most buyers correctly realize that a change in staff may be too much for patients and can have a negative impact on patient retention through the transition.

When Putting a Dental Practice for Sale, Confidentiality is Important

A breach in confidentiality regarding the sale of your dental practice has the potential to sink the deal. This is the last thing you want and you need to protect against it. And although you may not relish the idea of keeping news like this from your staff, it is in their best interest that you do until the time is right.

While a prospective buyer will probably want to retain your staff, you have to consider the situation from the perspective of your staff and your patients. It’s a major change and change can be frightening, especially in an employment context. As the doctor at the end of a long career, you have a perspective that is very different from that of your staff. You once either bought or started a practice and know what it means to have a competent, experienced, and professional staff to support you. Your staff members have probably not had the same experience and may (not unreasonably) be concerned about their job security.

Because of this, you need to be concerned about the news of your dental practice for sale being public. If staff members become skittish, you run the risk of a couple of different negative outcomes. First, you need the news of your dental practice transition to not be public before you choose to make it public. If your staff doesn’t fully comprehend how a little idle chatter can impact the transition, and, by extension, their employment, you run the risk of a staff member mentioning the potential sale to a patient. Once that patient hears about the transition, will they want to stay with a new, unknown doctor? Or will they want to find someone else in the community that is trusted? If that patient knows other patients, will they tell those patients? How will they react? If you start losing patients before the sale is final, how will that impact the financing? Or the willingness of the buyer to go through with the sale?

Second, if a staff member is concerned about job security, they may immediately begin seeking other employment. Having a turnover of staff during your transition is problematic for a couple of reasons. It means you are going to have to be hiring new staff while trying to sell the practice. Those new staff members are going to need training and time to get up to speed on your office practices and procedures, which will impact efficiency. This is not something you need to deal with at that time, nor is it something you want the prospective buyer to see you grappling with. Also, changes in staff can impact patient retention. Your patients interact with your office staff more than with you, and their experience with staff will inform their opinion of the services being offered. So even if the news of the sale of your dental practice is not public, the turnover in staff can have the same negative impact on patient retention.

When Putting a Dental Practice for Sale, Timing is Everything

It’s impossible to overestimate the importance of timing in every aspect of your dental office transition, from when to put your dental office for sale, to when to hand over the keys and walk away for the last time. When to inform your staff is an essential part of this process and needs to be carefully considered. On a personal level, you may feel a loyalty to your staff that compels a desire to let them know as soon as possible. You must, however, do what will be in their best interest, which is to not inform staff until certain aspects of the transition process are locked down.

You need to be the one that is making the transition decisions. As discussed above, you may be the only one in the office that has previous experience with a dental office transition. In addition to risking staff defections or gossip about the sale, you also run the risk of staff talking to the prospective buyer outside of your presence. This would give them influence over the sale and the buyer that they should not have.

In addition to telling staff too early, there is a risk of telling them too late. If you wait until after the sale is final, your staff may feel betrayed, like they have been sold along with the practice to a stranger. You need to have a period of time before the sale is final to be able to inform staff, introduce the new doctor, and allay their fears. This way, your staff has time to address their concerns with you, get to know the new doctor, and prepare for the change.

How do you find the sweet spot? You should consult with your practice transition specialist about how to pick the right way and time to inform the staff. A rule of thumb, however, is that you inform staff after the buyer’s financing is in place and a purchase agreement is signed. This gives you, as the seller, a reasonable degree of confidence that the sale will close, while having time to work through your staff’s issues before closing the sale.

A common practice for doctors who have put their dental practice for sale is to call a staff meeting and inform everyone all at once. Your dental practice transition specialist can help you prepare for this meeting. In fact, it’s not uncommon for the dental practice transition specialist to run this meeting, given their experience with transitions and the common concerns that arise.

Although you may have a desire to speak to each staff member individually, the likelihood is that after you tell the first staff member, the rest will be informed while you are speaking with the second staff member. This robs you of the ability to present it equally to all staff members, to answer questions, and address concerns uniformly. You need to be able to control this message. After the staff meeting, if individual staff members have particular concerns, you can address those one on one.

Don’t Worry!

If you follow the pattern laid out here, you may be pleasantly surprised at how well your staff responds to the news about the dental practice for sale. You can introduce the buyer to your staff as a properly-vetted candidate who is well-suited for your particular practice. You can present to the new doctor with confidence, as a positive change for the practice, the staff, and your patients. This can go along way to calming concerns and making the transition easier for everyone. For more on this topic, read our post about How Staff Should Be Informed about the Sale of a Dental Practice.

ddsmatch Southwest: Dental Transition Specialists who Can Help You With Staff Concerns

At ddsmatch Southwest, we bring the experience of hundreds of successful dental transitions to work for you. We’ll do whatever we can to make your transition a successful one, including advising on, attending, or even running the meeting when you inform your staff about your dental practice for sale, whichever will be the most helpful to you, to your staff, and your buyer. Contact us today to find out how we can help you meet your dental practice transition goals.

Asset Allocation and “How to Sell My Dental Practice?”

If you’ve ever gotten into the weeds of the question of “how to sell my dental practice?” you’ve probably heard talk about allocation. There are different ideas about how to handle allocation and sometimes people disagree. This might make it seem complicated. But it’s not, really. There is a fairly simple rule to follow and, if you work with your dental practice transition specialist and your dental accountant, you should be able to negotiate an allocation that will work for both the seller and the buyer. But first, what is allocation?

Allocation of Assets

Simply put, the allocation of assets is the process of assigning a dollar value to each asset being transferred in the sale of a dental practice (excluding the building, if that is part of the sale). These assets include all of the tangible items of personal property included in the sale and the big intangible that usually accounts for the bulk of the value of a dental practice: the goodwill. We’ll get to why this distinction is important below.

Generally when you put a dental practice for sale, you aren’t selling the business entity (e.g., your LLC or S-Corp), you are selling what the business owns.  That is, you don’t sell your shares of the corporation, you sell off all of the corporation’s assets, including your furniture, equipment, patient records, supplies, your trademark and logos, etc. All of these items are specifically identifiable and can be quantified in value. That is, your equipment is worth what you paid for it, less depreciation over time. How much could you sell your used equipment for? That would be the value its allocated. As far as the intangible of goodwill, the value there is harder to determine and is more fluid.

The Simple Rule for Allocation

The simple rule for allocation of assets is that you determine the value of the practice (for more information on this topic, see our recent post on methods of valuation for dental practices, “How Much is My Dental Practice for Sale Worth?”), negotiate an agreement between the buyer and seller on the value of each category of tangible assets (e.g., the furniture and equipment is worth $150,000, the supplies are worth $10,000, etc.), and whatever remains after that is allocated for goodwill. It’s a fairly simple arithmetic problem, once all parties are on the same page.

For instance, if you are buying a practice for $1,000,000, and the tangible assets are valued at $200,000, the goodwill is then allocated $800,000, or 80% of the purchase price. Some will say that good will should always equal a certain percentage, or fall within a certain range, such as 75-80%. That’s really the tail wagging the dog. There is no rule for how much should be allocated to goodwill. Rather, goodwill tends to fall within that range as dental practices are valuated.

Why Allocation Matters

As you are wondering “how to sell my dental practice?” you might think this sounds like a lot of trouble to go through. Why not just negotiate the overall value of the practice with the buyer and leave it at that? In a word: taxes.

For the seller, tangible assets are taxed at the ordinary rate, whereas the intangibles are taxed at the more favorable capital gains rate. This is why it’s so advantageous to have a high percentage of the purchase price allocated as intangible goodwill. The tangibles have to be allocated at a fair market value. Fair market value is essentially what the buyer and seller agree upon, but has to be within a reasonable range. The rest can then reasonably be called intangible.

If you are a buyer, you want to be able to gain back the maximum amount of the purchase price over as short of a period as you can, by expensing, depreciating, and amortizing the assets. Some of the tangible assets, certain pieces of furniture and equipment, for instance, can be depreciated over five to seven years. The goodwill, however, will take longer to depreciate, 15 years.

How to Sell My Dental Practice and Get the Most Out of It

To maximize the value of the sale of your dental practice, you need to be careful with your allocations to reduce the amount that the IRS will take of your proceeds. This is why it’s so important to have a qualified team of professionals, with knowledge and experience specific to dental practice transitions, to advise you throughout the process. At ddsmatch Southwest, as expert dental transition specialists, we recommend that in addition to a transition specialist, you have dental attorney and a dental accountant who will understand the legal and taxation pitfalls and how to avoid them. We also recommend that you use a Certified Business Valuator to evaluate every aspect of your practice to get it ready to put on the market. At ddsmatch, we partner with Blue & Co., for dental valuation consulting and dental accounting.

If you are considering a Texas dental transition or New Mexico dental transition in the next five years, contact us for a free, no-obligation Practice Transition Assessment. We will discuss the current local dental practice transition marketplace, establish best transition options for your practice, and advise on potential practice investments to increase value. Contact us today and find out how we can help you meet your dental transition goals.

Why Do I have to Sign a Non-Compete When I Sell My Dental Practice?

If you are transitioning your dental practice with the intent to retire from dentistry, you might ask yourself, “if I don’t intend to work as a dentist, why would I sign non-compete agreement when I sell my dental practice?” It may seem unnecessary to you. To the buyer doctor, however, this document is extremely important. In this post, we’ll discuss a little about what these agreements are and why they matter.

Before we get started, however, please understand that the issues surrounding these agreements are legal matters and you need a qualified attorney to counsel you regarding the reasonableness and enforceability of non-competes in your state. This post is for general informational purposes only and should not be relied on for legal advice.

What is a Non-Compete Agreement?

A non-compete agreement is a contract in which one party agrees to not compete with another party in their area of business within a defined geographical area and for a certain length of time. A non-compete agreement may include non-solicitation provisions which prohibits one party from soliciting customers away from another party.

In dentistry, these agreements come up in three basic scenarios:

  1. When Hiring an Dental Associate: the dental associate will likely be asked to sign a non-compete agreement that covers the period after the associate leaves the practice. It would protect the practice by prohibiting the former dental associate from competing directly with the practice or using information from patient files to lure patients away.
  2. When Entering into a Dental Partnership: similar to the dental associate scenario, the agreement covers the period after a partner leaves, to protect the practice.
  3. When Selling a Dental Practice: Again, the agreement is to protect the practice. But, here, the doctor being protected is the buyer—the new doctor. The agreement prohibits the seller from practicing within a certain area for a certain length of time, thereby increasing the chance that the practice’s existing patient base remains with the practice, even after the departure of the long-time owner.

In most states, these agreements are enforceable (California is one notable exception). This means that, especially with regard to dental associates or when you decide “it’s time to sell my dental practice,” a non-compete agreement will likely be a non-negotiable part of the deal. And, in fairness, they are a good idea for whichever doctor is left in the dental practice.

For the buyer of a dental practice, it’s important to be assured that the selling doctor is not going to pocket the money, open a practice across the street, and take all of the patients with them. Also, if the selling doctor is going into retirement, that’s uncharted territory for the seller. What if after a few months or a year or so the seller decides they don’t really like being retired? The buyer wants a guarantee that they will have time to establish themselves in the practice and earn the trust of the patients and staff before having to compete with the seller.

Reasonableness of the Terms

A key to the enforceability of the agreements is whether the terms are reasonable. What does that mean? Well, it depends. It depends on the state law governing the agreement and it depends on the location of the practice. Again, you will need a qualified local attorney to advise you on these issues.

There are two main points on which the agreement must be reasonable: the scope of the geographical area being restricted and how long the restriction will be in place. For the length of time, two to three years is a common duration, although it may be up to five. For the geographical area, it will largely depend on where your practice is located. For instance, in a dense metropolitan area, such as New York City, the area may be small, defined in city blocks. However, in rural Texas, a dental practice for sale might be the only one in a 50-mile radius.

One guide to determining a reasonable geographic area is, before you think “it’s time to sell my dental practice,” consider where your patients live. The area that you draw patients from can be quantified as the area in which about 80% of your patients live. That way you capture the bulk of your patients without chasing the outliers that might make the area too broad and, therefore, unenforceable.

A word on the enforceability of unreasonable restrictions. Some employers or buyers of dental practices might purposefully try and see what they can get away with in terms of overly broad restrictions. This is a bad practice for both parties as it relates to the agreement. Overly broad terms may have the effect of invalidating other parts of the contract which are related—so if you are the one asking for the non-compete, don’t push your luck by asking for too much. If you are the party being restricted, sometimes courts will take the approach that you knew what you were getting into when you signed. Don’t take the risk. Plus, do you really want to be contractually obligated to a party that is trying to get something from you unfairly? In that situation, it’s probably better to walk away.

Other Considerations for the Terms of the Non-Compete Agreement

  • What circumstances will negate the agreement? If the practice ceases operations, is sold to another dentist, or moves location, you should consider how these factors will impact the agreement. For instance, if the practice closes, maybe the agreement should no longer be enforceable. If the practice moves, it should probably depend on where it moves, and how far that is from the original location (e.g., whether it changes the geographical area from which the practice draws the majority of its patients). If the practice is sold, there will likely be a non-compete between the parties to that sale. That would be a situation you’d want to discuss with your attorney.
  • Does it cover going to work for an existing competing dentist? This is mostly applicable to former dental associates or partners, although it could arise in the sale of a dental practice. Even if the change in employment is not advertised and no one is stealing patients, it’s still possible, especially in a small town, that people will learn of the change and that could draw patients away. This is something you should consider and discuss with your attorney and dental practice transition specialist. If you are dealing with a partner or employee leaving the practice, they may be leaving because they are unhappy in the practice, a factor to be carefully considered.
  • Are staff covered by the non-compete agreement? Do you want to prohibit the other party’s ability to hire your staff away from you? Will you state laws allow you to do anything about it proactively?
  • If partners are splitting a practice, how do you divide the resources? Who keeps the patients? Who gets the referral sources? These factors must be decided before you can move forward with any further restrictive agreements.

You Need a Trustworthy Specialist when it’s Time to “Sell My Dental Practice

At ddsmatch Southwest, we are expert dental transition specialists who draw on the experience of hundreds of dental practice transitions from across the country to assist and advise our clients with their dental practice transitions in Texas and New Mexico. One of our satisfied clients said one thing he especially appreciated about the dental transition specialist that handled the sale of his dental practice was that  

“Your issues were his issues . . . the thing that was amazing with me was that I absolutely knew nothing, but absolutely had an amazing experience, and that’s because Andy took good care of me. . . . He’s a good guy. He looks out for his clientele.”

You can read more about that client’s experience on our Dental Transitions Blog.

Whether you think “it’s time to sell my Texas dental practice” or whether you think that time is still a few years down the road, it’s not too early to find out what ddsmatch can do to help you meet your dental transition goals. Contact us today for a free, no-obligation consultation.

What Will Dentist Practice Appraisals Show about Your Overhead Costs?

One of the major factors that affects value in dental practice appraisals is overhead. Overhead is a term that represents the ongoing costs of operating a business. These are expenses you incur regardless of how many patients you see or how much you charge in fees. These include rent, employee wages and benefits, lab costs, materials, and so on. Simply stated, overhead is everything that isn’t money in your pocket.

Overhead is important for three related reasons. First, it tells you how much it costs to run your practice. Second, it shows the profitability of your business. For instance, if your overhead costs are 65%, which according to some researchers is about average for general dental practices, this means that for every dollar you collect, $.65 pays your overhead and you get to keep $.35. And, third, when you start to look at overhead by category, it shows you where you might trim some fat to make your practice more profitable.

Some overhead expenses are fixed, such as rent, meaning they don’t change from month to month. Some are variable, such as costs for certain materials or lab costs, which will vary depending on your patient treatments. And some are semi-variable, like utilities, where you may have a fixed base charge with additional costs that depend on usage.

While it’s important to look at your overhead costs as a whole, the real work is done by looking at each category, line by line. There are national averages which can be a rule of thumb on where you should be with each category, but these are just general guidelines. If you are over the average on rent but under on employee costs, it may balance out, as an example. But national averages can also be problematic. For instance, as noted above, the national average for total overhead may be as high as 75%, but 60% is really where most practices should be. Below, we’ll discuss a few categories where you can start to examine overhead, especially if you are considering putting your dental practice in Texas for sale or are considering dental practice appraisals.

Employee Costs

Number of Staff Members

If you are like most doctors, this is your biggest expense. The target here is for employee costs to be about 25% of your intake, and that should include not only wages and salaries, but also any benefits, bonuses, and any other compensation. If you are above that range it likely means one of two things: you either have too many employees, or you are paying them too much.

Over-hiring is a common problem. If your staff is busy and balls are being dropped, the easy solution is to hire another person. But you have to carefully consider whether you really need another employee, or if your present staff just needs more direction or training. Hiring additional staff doesn’t typically solve the problem, and in most cases, it just creates a new one in the form of higher overhead. If you’ve already made this mistake, you are faced with a tough decision. Eliminating staff is one of the most difficult aspects of running a business, but, at the end of the day, you need to have a dental practice that is running as efficiently as possible.

Managing Staff Members

If your office isn’t running smoothly, it may be because you haven’t been as effective in your role as CEO of your dental practice as you need to be. Being a good doctor doesn’t necessarily mean you are also a good manager. But that doesn’t mean you can’t learn how to better support your employees.

If employees are not clear on their job descriptions and responsibilities, if they lack the vision to see where they fit into the whole of the operation, or if they are not as efficient or productive as they could be, more often than not, it’s a matter of training, supervision, and support. Having specifically delineated job descriptions, written policies, and clear instructions on office procedures can go a long way toward making sure everything is being done properly and on time. Employees benefit from performance measurements and frequent feedback, and your business will benefit in turn from the increased efficiency, which will be reflected in dental practice appraisals.

So, before you hire another person, look at, for instance, how patients are moving through your office. How long do they spend at the front desk? It shouldn’t take more than 10 minutes to check a patient in and out. If your offices sees 20 patients a day, that’s 200 minutes of time at the front desk. If there are 480 minutes in a work day, you shouldn’t need more than one person at the desk. If your front desk person can’t keep that time in line with where it should be, even with additional training and support, then what you need is a replacement, not additional labor.

Employee Compensation

There is a notion that employees should get some kind of pay increase each year. This is wonderful  if your practice is increasing collections each year. However, if your practice is stagnant or declining, you simply cannot afford yearly raises. Remember that every dollar of increased overhead is a dollar by which you decrease profits. If you can give raises and maintain 60% overhead, then it is fair to compensate your employees for the efficiency they bring to your practice.

If giving raises will take your employee overhead costs above the 25% target, then you should consider making raises dependent upon the practice’s performance. While stagnation or declining profits is not likely the fault of one employee, it’s unlikely, under these circumstances, that your employees are operating at peak efficiency. And if they know that they’ll get a raise each year regardless of performance, they will lack incentive to improve. Here is where performance standards can carry real weight— instituting a policy where raises must be earned on the basis of what an employee brings to the business.

Patient Recall

One of the many factors potential buyers of dental practices want assessed in dental practice appraisals is patient recall. Returning patients indicate that your monthly and annual collections are something that can be replicated in the future. When a young doctor buys a dental practice, they want future success, not past ones.

Unfortunately, many doctors don’t prioritize a patient recall system. If you haven’t already, you should set up procedures for your patient coordinator to contact past-due patients and schedule appointments, with a goal for making a certain number of calls and appointments each day. Recall patients bring in revenue you would not have otherwise collected, increasing profitability and reducing overall overhead.

Raising Fees

Many dentists resist raising fees because they think that higher costs for patients might drive those patients to other practices. The fact is, consumers expect prices to rise over time. If you regularly review your fees and make incremental increases, keeping in line with the market value of your services, it won’t surprise or upset most patients. The problem is waiting too long. Then you have to make bigger increases, which are harder for patients to accept.  Also, if you have an eye toward selling your dental practice in Texas, a potential buyer may be wary of a practice that has too low of fees. If the buyer wants to bring fees in line with market value, they don’t want to be the one to do it, as a change in ownership coupled with higher prices may increase patient attrition.

Other Important Overhead Categories for Dental Practice Appraisals

The other overhead costs you can count on for any dental practice will be rent, utilities, lab costs, materials, equipment, marketing, and accounting. There are industry standards for how much of your overhead should be allocated to these categories. For instance, rent should be about 6-7%, materials and lab costs should be about 6% each, marketing should be about 2-3% of your overall overhead costs, and account should be about 1-2%. Before you put your dental practice for sale, you may want to consider having a business valuator look at your practice and review where your costs can be reduced. When a potential buyer reviews a dental practice appraisal, they’ll be most interested in a dental practice that falls within these industry standard ranges.

But, remember, these are averages. If you are high in one category, making that reduction can bring you within the overall ideal range, then discrepancies in other categories will appear less problematic. Once you know where your costs are and make the necessary adjustments, keep an eye on each overhead category every month to watch for waste, inefficiency, or other ways your costs may be unnecessarily high.

At ddsmatch Southwest, we are uniquely experienced in helping clients who are selling a dental practice to achieve their profitability and lifestyle goals. We are expert dental practice transition specialists, and will help you identify a buyer with a strong skill set and personality match that will carry on the practice and legacy you have worked so hard to build. We ensure that every detail is covered, help you avoid common mistakes, and ensure no step is overlooked.  Plus, your confidentiality is always guaranteed. Contact us today for a free, no-obligation Practice Transition Assessment and find out how we can help you get the most for your practice.

How Much is My Dental Practice for Sale Worth?

When it comes to valuing a dental practice for sale, there are a lot of different methods and theories. In all honesty, there are so many variable factors that there is no one formula where you plug in numbers on one end and get an objectively correct answer out the other. But there are a couple of rules of thumb that can give you a good idea of a ballpark range. Realistically, you’ll need to work closely with your accountant, your dental practice broker, and, ideally, a certified valuation analyst (here at ddsmatch Southwest, we partner with Blue & Co. for our client’s valuation needs).

The two most common methods for valuing a dental practice dental practice for sale are to use a multiple of collections or a formula relying on your earnings before interest, tax, depreciation, and amortization (EBITDA). We’ll discuss each in turn and then discuss why these numbers will only tell part of the story.

Multiple of Collections

The multiples of collections method is fairly simple, until its not. The simple part is that it’s just a multiplication equation. You take your total collections (or gross revenue from the practice) and multiply it by a percentage. This, however, is where it gets less clear: what percentage do you use? Historically, the average answer has been about 67%, although you will also hear this should be 70-80% of the average of your last three years collections. Another way to consider this approach is the price to gross revenue. That is, what will the buyer be willing to pay for each dollar of collections? $.67, $.70, $.75, or $.80?

Our use of the word “historically” should be telling. This method of valuation is become less common as the business side of the dental industry changes (more on this in the next section). However, before you get too excited about the simplicity of this method, consider the following hypothetical: if you have a practice will $1m in collections, using a multiple of collections method, the practice could be valued reasonably within the $670,000-$800,000 range, depending on other variables. The problem here is you are only looking at one number, the total collections. You don’t have any information yet about overhead and other costs. This hypothetical dental practice for sale could actually be worth much less.

EBITDA

The earnings before interest, tax, depreciation, and amortization (EBITDA) is becoming increasingly popular as the business side of the dental industry has experienced a shift towards a greater number of group practices being driven by entrepreneurial dentists and outside investors. With group practices being more and more focused on investor returns, there is a shift to an investor perspective of owning and operating dental practices. Typically, investors consider the actual debt-free cash flow, rather than gross collections, as the most reliable indicator of the likelihood of a return on their investment. The EBITDA method can be considered a price to earnings method. The question here is how much is the buyer willing to pay for each dollar of free-and-clear net earnings?

This method is trickier because determining your debt-free earnings is not as simple. Also, the range for the multiplier for EBITDA is much wider (you can see anywhere between two and 18 as the correct multiplier) and more variable by practice type. For a solo practice, a reasonable multiplier might be three-to-four times. For a multi-doctor practice, in might be four-to-five times. For a multi-location practice, it might be five-to-six times. And for a group practice with infrastructure and scalability, it could be six times and up from there.

When we apply the EBITDA method to our above hypothetical, you can see both the difference and the advantage of this method. If a dental practice for sale has $1m in collections and 60% overhead (which is about average for a dental practice), its EBITDA is $400,000. But, what if a practice has an above average amount of overhead? If a practice has $1m in collections but 75% overhead (if, say, the practice has more employees than it needs or the doctor pays themselves a hefty salary), the EBITDA is only $250,000. The multiplier of collections would place both practices at the same value, however, the second practice is clearly worth less than the first.

The Rest of the Story

There are two major factors that are not accounted for in either of these models. First, as mentioned previously, there are all kinds of variables that impact value outside of the information used in either of these valuation methods, including:

  • Location
  • Product mix
  • Payer mix
  • Fee schedules
  • Referral rates
  • New patient acquisition
  • Fixed assets
  • Whether office is leased or owned
  • Cosmetic appearance of the office
  • How modern or well-maintained is the equipment
  • Availability of financing and current interest rates
  • Transition plan (whether seller will stay on for a period)
  • Community goodwill and how well that will translate to the buyer

All of these things will impact the value that both the buyer and seller will place on the dental practice for sale. Which brings us to the second factor: market value. At the end of the day, a practice is worth whatever it can bring from an open market. All of the valuation methods are simply ways to try and reach an agreed upon range from which negotiations can start.

We Work for You to Get What You Want for Your Dental Practice for Sale

Here at ddsmatch Southwest, our goal is to help you meet your dental practice transition goals and get a deal that you think is fair. As part of our Trusted Transition Process, we work with you by discussing the current local dental practice transition marketplace, help establish the best transition options for your practice, and suggest improvements and investment options that will result in a real return in the sale. Contact us today for a free, no-obligation Practice Transition Assessment.

Using a DSO When Selling a Dental Office

In the world of dental practice transitions, there is a lot of talk these days about the increasing role of corporate dentistry. If you are wondering whether you should consider these options as you put your dental office for sale, it’s important to understand what these options are, what they aren’t, and how they are different.

Dental Service Organizations

Dental service organizations (DSOs) are management companies which own and run multiple practices. Examples include Heartland, with over 800 locations across 36 states, and Aspen Dental Management, with more than 650 locations. A DSO will have their own methods, meaning they’ll have a management organization, fee schedule, staffing requirements, and other business tools that they’ll want to impose on your office. Uniformity is part of the key to success, replicating the functioning of one office across many. If they have a good model, theoretically, a DSO can smoothly run a practice from a business standpoint and not get in the way of providing quality care.

If you sell to a DSO, you become an employee. This can be a good option for a dentist looking at retirement, but not quite ready to give up the game. You can still provide treatment for your patients, receive a salary and benefits, but not have to deal with as much of the business or administrative side of things that takes up your time after office hours. If you are looking to cut back hours or responsibilities, this can be a good option.

If your concern is getting the most money out of your practice, a DSO can similarly be a good choice. A DSO will have deeper pockets and easier access to more financing than a private buyer. And, given that a DSO typically has a long term goal of expansion into additional markets, seeing the gains from their economies of scale, they may be willing to outbid private sellers.

The downside may be your legacy and possibly losing the goodwill of your patients and community. You’ve worked all of your career to build a successful business. If you use a dental practice broker, such as ddsmatch Southwest, when you put your dental office for sale, we use our expertise to help identify a buyer with a strong skill set and personality match that will carry on the practice and legacy you have worked so hard to build.

While a DSO is staffed with real people, who care about the treatment they provide, their doctors are merely employees with a limited ability to respond outside of the corporation’s practices and policies. How much this is an issue is a personal determination that will vary from practice to practice. If you want to consider offers from DSOs, you are still well-advised to retain a dental practice broker as the issues that arise in the sale to a private buyer are mostly the same as the ones involved in selling to a DSO.

Private Equity Groups

By contrast, private equity groups typically don’t buy practices, they invest in them. Private equity groups are investment management companies that provide financial backing, as an investment tool, in either startups or operating business. A private equity firm generally doesn’t have an interest in being involved in day-to-day operations. Rather, they are looking for a return on an investment.

A common mistake people make when thinking about private equity investments is believing that the investor is looking for a return from the practice’s existing cash flow: that the investment is given in return for a percentage of the current earnings. If that were the case, private equity investing would not be a good investment tool. Why would you need an investor if you already are making enough profit? Private equity investors are not satisfied with your practice’s status quo. Rather, the investor sees an opportunity for growth and wants you to expand your practice with their equity.

Therefore, rather than selling your practice, you are, in effect, becoming a manager of the private equity group’s investment. Their investment gives them leverage over you to expand your practice. If you are looking to expand, this can be a good way to do it, rather than financing through a bank and increasing your debt load. You can greatly increase the value of your practice, the return on which you will reap when it does come time to sell. If you aren’t interested in becoming a business manager over a group of practices, then private equity investing is not a good way to go.

Currently, there is a merging of DSOs and private equity, with investors seeing DSOs as a field ready for harvest. In March 2018, Heartland Dental announced that a private equity firm had acquired a 58% stake in the company, in which it was valued at $2.8 billion. Other private equity groups have made investments in DSOs, but the jury is still out on whether Heartland Dental will be “a kind of Walgreens for the dentistry business” or whether the company is overvalued and overleveraged.

Is it a Good Idea to Sell to a DSO?

Again, this comes down to some very personal choices that must be carefully considered when you put your dental office for sale. While the ADA put the number of doctors working in DSOs at about 7.4% in 2017, it noted that for younger doctors (ages 21-34), that number jumped to 16.3%.  Doctors are leaving dental school with unprecedented amounts of student loan debt, which can make banks worry about financing for the purchase of a practice, especially when the doctor is lacking hand speed and production capabilities that only come with time and practice. The bank wants to make sure it gets its return, too. Young doctors are finding a safe bet is to join an existing practice to gain that experience, and DSOs can give them that time while offering a potential to build equity in the practice.

On the other hand, DSOs have gotten themselves into trouble with practices that indicate they may be more concerned about their bottom line than responsible treatment and ethical practices. Earlier this decade, a U.S. Senate investigation determined that some DSOs were providing unnecessary treatment to children to collect more from Medicaid. Also, early last year Benevis LLC, which operates Kool Smiles clinics in several states, settled with the U.S. Department of Justice and paid a fine of $23.9 million plus interest for submitting false Medicaid claims.

ddsmatch Southwest Can Help You Get What You Want When You Put Your Dental Office for Sale

At ddsmatch Southwest, we take the experience of hundreds of successful dental practice transitions from all across the country and put it to work for you. As seen here, there are a lot of tough questions about how to get to where you want to be when you put your dental office for sale. We can help you review your options, look at the benefits and drawbacks of each, and offer unbiased advice about what choice is most likely to get you to your goal. Our definition of a successful deal is not just one where papers are signed and money changes hands. It’s one where the parties walk away happy, feeling like they got a good deal. Contact us today and find out what we can do for you.

Are You Thinking About Selling Your Dental Practice?

If you aren’t thinking about selling your dental practice, you should be. We’re not saying you should sell it now. Rather, you should be thinking about when that day does come and what you can do now to be better positioned to maximize your practice’s value. Here, we’ll discuss some things that you can do to start preparing, no matter where you are at in your career.

Start Planning Early

We all hope to be able to retire on our own schedule, but life often has other plans in mind for us. Should you become ill or injured, should you fall prey to a repetitive motion disorder, you may find the time to sell your dental practice arriving sooner than you think. And while we are not advocating you should assume the worst, the fact is that dentists who are compelled to sell their practice on a short timeline (less than one year) are more likely to get less than the actual value of their practice.

Conventional wisdom puts planning for a dental practice sale at a minimum of between two to four years. Here at ddsmatch Southwest, we say that if you think you are five years or less out from retirement, it’s a good time to have your practice evaluated by an outside consultant who can advise you on any changes or upgrades that will bring you a return in the sale. For doctors in that five year range, we offer a free, no-obligation Practice Transition Assessment.

Starting early has a couple of benefits. First, you need to realistically consider how long the transition will take. It’s not just about doing a bit of spit-and-polish, signing papers, and handing over the keys. Depending on your practice and the buyer, you may want (or need) to stay on for a period to help the buyer transition into the practice. If you’re counting the days until you can spend your days on the golf course, keep this in mind.

Also, some of the upgrades you may need to make for your practice to be reasonably attractive to a buyer may take time to implement (if you have issues with your patient base) or to make profitable (if you need to upgrade equipment or software). If your upgrades are expensive, or require a learning curve, you need sufficient time before they stop costing you money and start earning you money.

Don’t Mentally Retire Before You Actually Retire

The closer those last days or weeks or months get, the more tempting it may be to start easing into retirement. Don’t. When the buyer’s bank assesses the value of your practice, they aren’t going to rely on numbers that are five or ten years old. They want to know what the practice is earning right now and in the recent past—one to three years. If you’ve started cutting your hours, referring more work out, cancelling insurance plans, reducing the number of patients, or doing less marketing, you run the risk of devaluing your practice.

Know What Gives Your Practice its Value

This can be summed up in three simple words: active patient records. A nice clean office with up-to-date and well-maintained equipment and a pleasant, professional staff are all great things to have. But, in and of themselves, they have little value without a strong and growing patient base. Most importantly, you need to be able to show a steady stream of work for the 18 months prior to your valuation.

When you sell a dental practice, what you are really selling is you active patient records. This, along with your brand (the practice’s reputation and goodwill in your community) account for 75% or more of your practice’s value. These “intangibles” are by far your most valuable assets. Their value is increased when paired with an efficient business. If you have high overhead costs, you’ll get less than a comparable practice with a better cash flow. The buyer is going to look for a practice that can provide a reasonable income to cover their living expenses after servicing the debt of buying the dental practice. So, a strong active patient base plus good cash flow yields a better sale price.

Some other considerations on increasing cash flow and building value include:

  1. Raising Fees. Too frequently, older doctors are reluctant to raise their fees. Given that profitability is a major driver of a dental practice’s value, you must avoid making this error. Raising your fees each year may be the best way to guarantee increases in collections and profitability, which benefit you both immediately (more income that you get to keep in the practice) and at the time of sale (higher market value). Also, your buyer is going to want to have fees that are in line with the current market but not have to immediately raises fees after the transition, possibly driving away patients.
  2. Overhead. Keep a careful eye on all of your costs. Create a budget each year with specific amounts allocated for each overhead category. Be sure you are aware of current industry standards to make sure you aren’t overpaying for lab or supply costs. If your practice isn’t growing, you cannot afford to give annual cost of living raises. If this is the case, you may instead consider bonuses that are tied to increased collections. The lower your overhead, the greater your profitability, and, therefore, the higher your market value will be.
  3. Keep marketing. Just because you are retiring doesn’t mean your practice is going stop running. It might surprise you to learn how often doctors approaching retirement will cut back on marketing efforts or stop them altogether. As discussed above, the lending bank wants to know how your practice is performing right now and in the more recent past. You need your numbers to be on a consistent upward trend. A dip at the end will be a red flag that the practice has a problem. Also, make sure that you are keeping up with modern marketing trends. Your first efforts should be on referrals. But you should also update your website, invest in online marketing tools (search engine optimization, or SEO, to make sure you show up in online searches), and get patient reviews on Facebook and Google and post them on your own website.
  4. Update your office and technology. If you are closer to retirement (under two years) you can make cosmetic improvements to your office. First impressions matter (and ongoing impressions matter to your patients). If you have more time, you should consider your equipment and technology. Your buyer will likely be young and more familiar with the latest technology. However, you will need time with new tech to learn and become proficient. Once you do, however, it can bring you a return by increasing your patient flow and your treatment acceptance rates. These, in turn, will be reflected in your books as increases in profitability.

 

 

Think About the Impact of a Transition Plan on the Practice

When selling a dental practice, it’s common for the seller to stay on for a period of time. If your buyer is not already working in your practice (such as an associate or partner), this means the practice will have to support an additional doctor. You need to consider how that will impact cash flow and any existing practice debt, and whether you have sufficient revenue to support another doctor. The bank will certainly consider this when determining whether its willing to finance the purchase. These details need to be carefully considered but may be hard to predict, as what the buyer wants will impact how long you need to stay on, if at all.

ddsmatch Southwest Can Help You Sell Your Dental Practice

At ddsmatch Southwest, we bring the experience of hundreds of successful dental practice transitions, of all types and from across the country, and put it to work for you. We use that experience to help you identify a buyer with a strong skill set and personality match that will carry on the practice and legacy you have worked so hard to build. We ensure that every detail is covered, help you avoid common mistakes, and ensure no step is overlooked.  Plus, your confidentiality is always guaranteed. Contact us today and find out how we can help you meet your practice transition goals.

Build Value Before Putting Your Dental Office for Sale

There are typically two phases a dentist goes through when thinking about the value of their own dental practice. The first comes early, when a dentist is concerned with take home income—that is, “How much can I earn right now?”  The second comes later, when the doctor begins to think about transitioning the practice. Then the doctor is concerned with “What is my practice worth?” The fact is, however, many things that determine what the practice is worth are built in early in a doctor’s career. Here are some important things to consider early on that will pay off when you are ready to put your dental office for sale.

Your Value is in Your Brand

“Brand” is a hot buzzword right now, as social media influencers are concerned about their personal brands. This sort of talk can be annoying. But remember what a brand actually is. It began as a mark to identify livestock (and, later, goods in commercial markets) to denote ownership and deter theft. Presently, the term has broadened to encompass an overall experience of a customer that distinguishes an organization or product from its competitors. For a dentist, it can be your own name, but it’s really about the good name your practice has, and your reputation among your patients, and in the community.

A strong brand is important for a dental practice for the purpose of attracting and keeping patients. Without it, it’s unlikely a practice will have a strong patient base. And while you may look at your practice and see deep patient files, lots of new patients each month, high referral and case acceptance rates, and a full appointment book scheduled out for several weeks, what you really have to offer when you put your dental office for sale, is a strong brand. That is what the buyer is paying money for.

This is important to consider early in your practice because you want a strong brand that is not explicitly tied to your name. If you open an office as John Doe, DDS, built a solid reputation of goodwill in the community, and are known as a provider of excellent care and quality service, what will happen when John Doe is no longer part of the practice? Patients will find a new dentist (studies have shown that up to 40% of patients will leave under these circumstances). Buyers know this and may not be willing to pay as much for a practice that is too explicitly bound up with a single dentist’s identity.

While you want to be known as a good dentist, it’s more important for the life of your practice to survive some inevitable patient attrition after the practice transition. This can be easy to address early in one’s career, when one’s name is less well known. However, even for established dentists, rebranding to a more general practice name that leverages existing affinities in the community is not a risky move and can get your more when you transition your practice.  For instance, in Farmington, Utah, a historic hotel built from stone was refurbished and operated as “Rock Hotel Dentistry” to build on existing goodwill in the town’s pioneer heritage. Consider local affinities you can leverage in building your own brand.

Be Properly Organized as a Business

In a large corporation, each department has a head. In a small business, too often the owner tries to do it all. The fact is, as a practicing dentist, you can’t. You simply don’t have the time. This is why it’s important to have a solid organization with clear lines of responsibility and a consistent monitoring program, or else you’ll find details being overlooked and balls being dropped.

How you organize may be unique to your circumstance. However, you need to have structures organized for every aspect of your clinical care, operations, accounting, marketing, and personnel. You, of course, remain CEO and are ultimately responsible for everything. But this doesn’t mean that you can’t leverage your staff’s skills or outsource things such as marketing and accounting.

On the point of accounting, it’s more important than ever to have a solid set of well-organized and detailed financial records. Buyers are not content with a simple report of production and collections. They now want to review earnings before interest, taxes, depreciation and amortization (EBITDA), gross margins, assets, the lease agreement, and patient base. As with every aspect of your organization, the more prepared you are (and the sooner you start), the more likely you are to get what your practice is worth when your put your dental office for sale.

Once you have a smoothly running operation, it’s important to regularly review each part to see where you can refine processes and update your business systems. In part, you want buyers to be impressed with your efficiency and organization. But, importantly, this can translate into higher profits for your and a more quantifiable increase in value for buyers. In a study by Deloitte, businesses that use state-of-the-art business and human resource systems can average cost savings of 22% per employee. That kind of cost savings can be passed along through the practice transition, making your practice more valuable.

On the same point, up-to-date systems for re-care and reactivation will ease the transition for the new dentist, an attractive selling point. You can do the same with automated systems for submitted claims and receiving payments from insurance providers. For more one this, read our recent article about how back-office automation can build value for your practice.

Leave Profits in the Business

A common practice among small business owners is to pay the employees, pay the bills, and take the rest home. This might seem like a good idea in the short term, however, what it’s really doing is obscuring how profitable your practice is for potential buyers.

A better practice is to pay yourself a salary just as you would an associate, typically about 30% of collectable production. This makes your take home pay a predictable recurring expense, with the remainder of your practice’s net income as profit. Your numbers will be more clear and concise, with the value of the practice more easily ascertained—the profitability will be easily quantified in your financial records, how you need it to be when it’s time to show them to potential buyers.

Also, this method makes a clearer distinction between you, personally, and your practice as a business organization. This is important because, first, you don’t want to have a murky and confusing set of books to open to potential buyers. But, more importantly, the protections that come from limited liability are lost when the owners commingle business and personal funds and expenses.

ddsmatch Southwest Can Help You Prepare Your Dental Office for Sale

If you are considering transitioning your practice in the next five years, ddsmatch Southwest offers a free, no-obligation Practice Transition Assessment. During this assessment, we find out your goals for your practice transition and offer professional, experienced advice on how to best prepare to sell your dental practice, including potential investments or improvements to increase value. We never advise a doctor to change for the sake of change, but only where we see areas that will add value in a sale.

Contact us today and arrange for your free Practice Transition Assessment.