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Should I Buy the Building when Buying a Dental Practice?

One of the most common questions about buying a dental practice is whether to buy or lease the space. And, as with many things in life, the answer is: it depends. It depends on the real estate market where you are looking to practice, whether the practice space is owned by the selling doctor or not, your plans for growing the practice, whether you foresee moving the practice, whether you want to deal with the additional responsibilities of real estate management, what kinds of risk you are comfortable with, just to name of few considerations.

Most advisors will say you should always buy. Some will say you never should. The fact is, that there is no consistent rule. Some doctors have bought their property and lost their shirts when the property devalued. Some doctors have built lucrative practices in leased space. So, ultimately, the question is really what will be best for you and your practice. Below we discuss some of the factors you should think about.

Return on Investment

When you lease, you are paying for someone else’s investment. When you buy, you are paying for your own. When you lease, your monthly payments will increase over time. If you are buying with a fixed-rate mortgage, your monthly payments will stay the same (unless you refinance or there are other loan terms that impact the payments). If you lease, you will pay rent every month until you someone else buys your dental practice. If you buy, depending on where you are at in your career, you may pay off the building and own it outright.

Conversely, when you lease, your landlord is responsible for maintenance and upkeep. When you buy, these are your expenses. When you lease, you have more flexibility to relocate if you need to expand beyond the available space or there are other reasons to move. When you buy, it’s much harder to relocate and cannot be done as quickly. When you lease, you are insulated from the factors that cause property values to drop. When you own, you take the brunt of any economic downturn.

If you choose to acquire real estate as part of buying a dental practice, you have the option of thinking beyond the needs of your practice. If your practice requires 2,500 square feet but are looking to expand, you can buy a 10,000 square foot building, divide it in half, and rent the other 5,000 square feet to another tenant or two or three. This creates an income stream separate from your practice. But it does mean increased costs in terms of managing the space, dealing with tenants, complaints, and repairs.

Also, when you decide, “it’s time to sell my dental practice,” you can choose to sell or keep the real estate, either getting the equity out of the building or an ongoing income stream as part of your retirement plan.

In the end, however, a lot of this comes down to whether you want the risk and responsibility of real estatement ownership.

Control Over the Property

For an entrepreneurial doctor who is buying a dental practice, buying the building (or constructing a new building) can have some real advantages. First, it gives you much more control over your brand, which is a significant asset. You can make the property look how you want. You get to choose your signage. And you get to choose who you share the property with, if there is space for other tenants. These things can add significant value in unexpected ways.

If you lease space in a medical plaza, you might get your name on small sign along with all of the other tenants. You also might not get a sign at all. If you are in a retail space, you might get a sign over your entrance. Or you might not. And you have no control over who is in the spaces around you. If the property is not managed well, you could end up with questionable business as neighbors, or in a space that has high turnover and frequent vacancies. None of these are good for your brand.

By owning the building you can do something such as install a highly visible LED sign at the street. While this can be a significant outlay, you need to consider what you are buying. If you pay, for instance, $17,000 on a sign, assuming you get ten years out of it, that works out to $1,700 per year for 24-hour a day advertising visible to every person who walks or drives past. Some dentists have reported that these kinds of signs have, on their own, increased their business—simply by being there.

Additionally, if you have space to lease out, you get to choose which kinds of business you rent to. There are opportunities for cross-promotion and strategic partnerships. If, for instance, you have pediatric dental practice, you can look for business that also cater to families and children. If you present the opportunity for cross-promotion (having marketing materials in each other’s locations, splitting costs on advertising, etc.) and the exposure from foot traffic, you can end up with a tenant who feels more like a partner and may be willing to pay over market value for the benefits.

It May Pay to Lease when Buying a Dental Practice

If you are a young doctor at the beginning of your career, you may have ambitions beyond those that the selling doctor had realized. If you see room for growth in your new practice, it might make more sense to start out with a lease, with an eye toward buying or building your own space later on.

It wouldn’t make a lot of sense to buy a dental practice and immediately move its location. The move, along with the change in doctor, could have a negative impact on your patient retention (especially if the landlord ends up leasing to another dentist). Also, the perfect space that you envision might not yet be feasible for the practice. Under these circumstances, you may be better off leasing for the first few years as you establish yourself in the practice—and in the community—and put your effort into planning how to expand and and working toward that goal. Then, when you’re outgrowing your present space, you can begin looking at buying or building a new space.

Another reason to consider leasing is the real estate market in the area you are buying a dental practice. If you are in a dense urban area, property values may be so high that buying real estate is not feasible. Also, if you are in a market where real estate costs are peaking, that’s a bad time to buy, as the market will inevitably correct itself. And while real estate tends to appreciate over time, you don’t want to be the one who bought right before the crash.

Tax and Balance Sheet Implications of Leasing versus Buying

Whether you buy or lease space, either can have a positive impact on your tax liability, but in different ways. Lease payments are generally deductible as an ordinary business expense, however, deduction limits may apply. On a balance sheet, however, lease obligations will appear as liabilities (similar to equipment or other assets that you would finance with a traditional bank loan).

When you buy property, on the other had, Section 179 expensing (referring to the tax code section that allows a taxpayer to elect to deduct the cost of certain types of property on their income taxes as an expense rather than requiring the cost of the property to be capitalized and depreciated) and first-year bonus depreciation can provide a significant tax savings for the first year the property is used by your dental practice. In fact, recent tax code changes have enhanced these tax breaks such that you may be better off buying things you would have previously leased (such as equipment).

Whether it will be better for your particular practice to buy or lease your practice space is a decision that needs to be made with the advice of a qualified tax professional.

ddsmatch Southwest Has Dental Practices for Sale in Texas and New Mexico

If you are looking to buy a dental practice in Texas or New Mexico, here at ddsmatch Southwest, we have several great options for you to consider. If you are considering selling a dental practice, we are dental transition specialists and can help you prepare and sell your practice on your terms, getting the most value out of your practice. Contact us today to find out what we can do for you.

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.

Don’t Let Student Loans Keep You From a Dental Transition into Practice Ownership

There is a lot of talk about how the landscape of the dental industry is changing, with DSOs, private equity investors, and rising student loan debt all contributing to the shift. While it’s true that these factors are more significant than they were a generation ago, it’s also true that the landscape hasn’t changed substantially. If you are in the final stages of your dental school education, or a young associate, student loan debt doesn’t mean that you can’t make a dental transition into practice ownership. In this post, we’ll discuss student loans and why they aren’t as much of an impediment as you might think.

Debt Compared to Potential Earnings

The first thing to consider is how much student loan debt you have, and how it will be offset by your earnings as a practicing doctor. If you are within the average range of dental students, you will have graduated with about $261,150 of student loan debt. If you borrowed at the Grad PLUS rate of 6.31%, you should have a monthly payment of about $2,940 and, over the life of the loan, will pay about $91,665 in interest. This means your education has a final cost of about $352,815 dollars. No question, that is a significant sum.

However, you have a lot of earning potential. In 2017, the median income for a dentist was $158,120. Now that doesn’t mean you’ll start at $158,000, but you’ll likely start somewhere in the range of about $118,000. Even as a first year associate, you will out-earn the average employee with only a bachelor’s degree by about $63,000. You can consider that $63k as the return on your $352k investment—and that’s just in the first year.

Using 5% salary increases, by year eight, you’d be earning about $167,000 while the bachelor-degree employee is only at $77,000. Your cumulative return over eight years would be $609,000—well over what you spent on your education and still fairly early in your career.

These numbers aren’t reflected in everyone’s experience, but, as averages, they show why its not unreasonable for a young associate to make the dental transition to practice ownership once they have the requisite experience and hand speed to keep up with the rate of production a practice needs from an owner doctor.

Types of Debt

You also need to consider the difference between consumer debt, student loan debt, and practice loan debt. Consumer loan debt (such as for a car, a house, or credit cards) doesn’t earn the borrower any money. Cars and other consumer goods either rapidly depreciate or otherwise lose value through use. A house may gain value over time but unless you are a real estate investor, it’s something you actively use, not something from which you would profit. Conversely, as shown above, student loan debt is an investment, the return on which is realized through your earnings over the course of your career.

A loan for the purchase of a dental practice is an investment in a business. The lender, while concerned about your debt load and earning ability, is primarily interested in the earning potential of the business, as it is the business that will pay back the loan. The question for the lender is whether or not the dental practice has a record of collections that will cover both its overhead, including the repayment of the practice loan, and still provide sufficient cash flow to pay you a salary sufficient to cover your personal debts including your student loans.  For more on dental transition loans, read our post, “Loans for Beginning a Dental Practice.”

As we show in the next section, owning your dental practice is actually a better way to pay your loans back faster than working as an associate.

Ownership Equity versus Employment Salary

The short version is that you are likely to earn significantly more if you own your practice than if you don’t. Let’s consider a couple of examples, one modest and one less so.

First, thinking modestly, let’s say you buy a practice with $600,000 of collections and 75% overhead at $450,000, with the entire cost financed by a bank. We’ll assume you have a few years of experience and have are up to earning $130,000 a year as an associate. With your new practice, you have a net profit of $240,000 a year. Now, you have a practice loan to pay back, which the seller probably didn’t have, so your net earnings will go down from there. A 10-year loan for $450,000 will have a monthly payment of about $4,700. This reduces your annual net profits to $183,000. However, that’s $53,000 more than you earned as an associate.

But let’s mix things up a bit. Sometimes an associate is paid a flat salary, but in other cases the salary is a percentage of their production. If, after a few years of experience, you are producing $800,000 each year, and your salary is 25% of your production, you’re earning $200,000. No doubt about it, that’s a great salary, especially if you are early in your career.

But what if you take your skills and make the dental transition into practice ownership? If you buy a practice that matches your $800,000 a year in production, even if the practice has 65% overhead, with service of your practice loan, you are still clearing over $250,000 in net profit. Plus, once you’ve paid back your practice loan (typically with a 10-year term), you get to keep all of the profits, which, with the given production rate and overhead costs, is $320,000 each year (consider this amount in the context of student loan as an investment, discussed above). If you remain as an associate earning a percentage, your salary only increase incrementally as fees are raised.

Dental Transitions: Texas and New Mexico

Here at ddsmatch Southwest, we are dental transition specialists with extensive experience matching individuals buying a dental practice with the right seller. Dental practice sales are predicted to increase in the coming years as doctors from the baby boomer generation decide to transition their practice and enjoy retirement.  Market conditions are excellent for those seeking to buy a dental practice or take advantage of partnership or associate opportunities. We have several available dental practices for sale throughout Texas and New Mexico, and always take your lifestyle and location goals, clinical skills, personality, and professional needs into consideration as we match the right buyer or associate with our sellers. For more information, visit our website or request a consultation today.

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.