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By: Bridgett Jorgensen, DMD

Whether you are a buyer or seller, a practice transition is often the largest financial transaction of your life. While a home or other real estate sale might be comparable, a practice transition involves many more moving parts and can significantly impact your future. This is why a sale is not typically a do-it-yourself project. Consider this: real estate transactions are straightforward, with tangible assets and comparables to aid in valuation. Once a real estate deal is done, you can walk away. However, in a practice sale, you may stay on for several years.

Here are some key considerations for both sellers and buyers:

Seller Considerations

1. Can you really afford to sell?

• Many sellers regret their decision. For some, it’s financial; for others, it’s having nothing to retire to. As the ‘doctor in charge’, your life changes significantly post-sale. Your spouse/family might end up with more of you but your take home pay may decrease drastically.
• Remember, your economic benefit from owning the practice is more than just your W2 or reported profits. Suddenly, fringe benefits like vacations surrounding continuing education, family members on the payroll, and personal purchases charged to the practice will come out of your pocket.
• Post-sale, you lose profits from the hygiene department and only get commissions based on your collections. Plus, who pays the lab fee?

2. Is the practice sale a major part of your retirement funds?

• If so, maximize its value. Older doctors often slow down, impacting production. This is evident if you start ‘watching’ major procedures like 5-unit bridges or if hygiene production rises disproportionately.
• Clear any credit balances owed to patients as these will be deducted from the sale price.

3. What type of sale do you want?

• If clinical work excites you but admin tasks do not, consider finding a partner who enjoys administration or merge with a nearby colleague.
• If you plan to stay on after the sale, be prepared for potential challenges with the new owner’s style and management.

4. Timing of the sale

• If you want/need to work 3+ days a week, selling may be premature unless you plan to bring in an associate to grow the practice before selling.

5. Who do you sell to?

• Options include selling to your child, an associate, a new doctor, a merger, or a DSO. Selling to a DSO typically require you to stay for three years under their control, which could be less beneficial than keeping and growing the practice for that duration and then selling.

Buyer Considerations

1. Understand that you are buying future potential

• Analyze how revenues were generated and their likelihood of continuation. Consider changes you can implement, like adding implants, but be aware of the impact on existing referrals.
• Evaluate the impact of fee schedule changes, such as switching from Delta Premier to PPO.

2. Seller’s flexibility in staying post-sale

• The seller’s desire to stay or leave should align with your plans. Banks may not support a deal if the seller insists on a long-term stay. Ensure that any agreement suits your needs.

3. Opportunity to buy the building

• While it adds debt, consider the benefits of owning the building. Lease liabilities are also significant, and mortgage payments might not be much higher.

Valuation

1. Intangible goodwill

• The practice’s value lies more in intangible goodwill than tangible assets. Ensure the patient base aligns with your practice style and target demographics.
• Assess the mix of procedures, such as crown and bridge work, and patient demographics to determine compatibility.

2. Be wary of ‘rule of thumb’ valuations

• Sophisticated valuations focus on adjusted net income rather than gross collections. Understand the adjustments made for personal expenses and ensure they are fair and reflective of actual business expenses.

Conclusion

These high-level considerations highlight the complexity of practice transitions. It’s crucial to work with knowledgeable advisors, including lawyers experienced in dental transitions and CPAs/tax advisors familiar with the business side of a practice. If you need assistance with obtaining a valuation, performing thorough due diligence, or just want to talk some things through — we can help.