Robert Davis
Aside from choosing a career in the field of dentistry, buying or selling a dental practice can be one of the biggest decisions a dentist makes. Because of the life-changing aspect of the sale, most dentists will have emotion attached to the situation which can be a powerful tool.
However, buyers or sellers of a successful deal know to step back and take a subjective look at the situation.
Similar to how you would treat your neighbor’s wisdom tooth removal with careful precision (no matter how you feel about them), the same type of approach is advised. Here we will look at the five steps you need to take when buying or selling a dental practice with a subjective lens.
What to Expect When You’re On the Market
Whether you’re thinking about selling your dental practice or buying one, there’s a lot to consider. But don’t start to feel overwhelmed just yet. Remember the key to any major decision is business planning, research, and time.
If you’re on the buying side, the good news is you’re in a great position to take over a dental practice. Many previously successful dentists are starting to reach retirement age and an estimated 60% are approaching 55 and could potentially be looking to sell.
If you’re selling, it’s time to start thinking about the value of your practice. To get a good idea of how much your dental practice may be worth, research practices for sale in your area. To get accurate numbers, avoid moving too far from your geographic location since market value relies on factors such as level of dentistry saturation.
Have a Clear Understanding of the Financial Aspect
People often say (Mary Poppins in particular) that a spoonful of sugar helps the medicine go down. As dental professionals, that’s probably something that’s frowned upon. So we’re going to give it to you straight and without the sweetener. There’s a lot to consider when buying or selling a practice and one of the biggest factors is the financial scale.
How much is the current market value of the practice? What is the cash flow? How many fixed-rate expenses compared to variable expenses? For doctors selling, these are the type of questions potential buyers will want to know.
Start with getting an up-to-date valuation of the practice by a professional appraiser. If you can find one that’s familiar with the healthcare industry, all the better. They may be able to give you a blueprint of comparable sales of dental practices of the same size in your area. Be prepared to provide your annual revenue as your sale price is generally based between 60-80% of that amount. Since not every practice is created equal, your appraiser will be able to help gauge if the estimated price is appropriate or not.
As the potential buyer, remember there’s a lot you’ll want to know about the practice before you sign the dotted line. Profit and loss statements will give you a good idea of what to financially expect in your first year of ownership. You’ll also want to be informed of case acceptance rates, staff compensation, amount of existing patients, and collection rates. It’s easy to focus on the sale price, but remember there’s more to consider than just a sticker price.
Seek the consultation you need to buy a dental practice.
Look to the Past for a Profitable Future
It doesn’t take a crystal ball or a tarot reading to discover whether or not the practice you’re considering buying has a stable financial future. Instead, look at the clues that the previous years have left you. If you are the seller, the buyer will want to have this type of information available as they make their decision.
The first thing to consider is the patient flow. If the practice has an established presence in the community, then you can count on some profit from existing accounts. However, there’s a buyer beware note here. Keep in mind no matter how good of a dentist you are, plan for at least a 10%-20% turnover rate. Some people don’t like change, and with the exit of the previous dentist, some people may seek care elsewhere—which brings us to our next point.
If the practice is well-regarded in the community you have the added benefit (and pressure) of inheriting the hard work of the selling doctor. If there’s a negative reputation, it may explain why the dentist is selling in the first place. Either way, you want to have a plan in place to make the practice your own. That includes new marketing, a new look, and a new brand.
Make Sure to Look At The Numbers
Getting back to numbers, a look at the practice’s patient foundation will give you the most significant data for future profits. To get the most acute information, investigate the following:
- Highest-yielding procedures
- Patient consistency
- Amount of new patients incoming each month
- Amount of active patients-to be considered active they need to have been seen in the last 12-18 months
- Patient demographics
- The most popular procedures performed
If you are the current practice owner looking to sell, make sure you have this type of information up to date and ready to present to potential buyers. Later on, we’ll provide a more precise list of documentation that will be requested at the sale.
Understand How Patients Are Paying
Aside from the number of patients coming in, consider how the patients are paying. As mentioned earlier, a well-performing practice has a collection rate of at least 90%. Are the patients paying with cash or insurance? If government assistance programs such as Medicaid are how a significant number of patients pay, keep in mind as the new dentist, you could be doing a lot of work for less pay.
Compare Expenses for Dental Practices
Finally, compare your fixed expenses vs variable expenses. Fixed expenses are those bills that will remain the same, at least throughout a year. That includes rent, utilities, labor costs, and insurance. A good sign of success (we’re talking less than 60%) is if your fixed variable is consistently lower than your variable expenses year in and year. Just think of it like cavities. The lower the amount, the healthier the practice.
The financial aspect can be pretty daunting for either the buyer or the seller. It’s advisable to secure the specialties of financial professionals who are familiar with sales in the healthcare field to help you navigate these waters.
How to Know if You’re Ready to Buy or Sell
One of the major players in the dental world is the aesthetics of one’s mouth. A nice smile can make a big difference in how people perceive you. Consider this idea for your dental practice. How would you perceive it aesthetically? If you think your practice could use some braces or a root canal, you might have some work to do.
When you look at the state of your practice with a critical eye, you’re helping yourself construct what a potential buyer may see. That includes the state of the waiting room, the wear, and tear of the office, and the amount of housekeeping that takes place. If you give yourself some time before selling, you can optimize a to-do list to bring out the best of your office space.
Do you have the right staff for your dental practice?
While you’re housekeeping, now is a great time to consider staffing changes. To a potential buyer, if there’s more than one new employee on staff, they may get nervous. Veteran employees are a valuable selling point to them. Make changes now before you think about putting the practice on the market so everyone is up to speed.
Remember that checklist mentioned in the financial section? We’ve circled back to that. Housekeeping should also include uncovering all the proper paperwork you’ll need. Buyers, pay attention here too because this is the information you want to ask for.
Make sure you gather:
- Profit/Loss statements
- Balance sheets
- Revenue percentages used in overhead
- Expense breakdown
- Revenue broken down by procedure
- Past three years of income tax returns
- Production reports for each doctor and hygienist
- Collection reports for each doctor and hygienist
These reports will provide the most acute insight into the value of the practice.
Now that you have the proper documentation stored in a safe place (if you think by ‘safe place’ we mean piled in cardboard boxes so high we could find Milton and his missing stapler in there, stop what you’re doing and digitize your filing system right now), it’s time to get the word out your practice is for sale.
Marketing The Sale of Your Dental Practice is Important
People love to hear news and spread news and since dentists are people too, a good place to start is to let your colleagues know you’re on the market. You can also consider looking/posting on dental sites, trade journals, or using real estate agents who specialize in healthcare sales.
The final step to buy or sell is to decide if you as the buyer would like the selling doctor to stay on for an allotted amount of time, and if you’re the selling doctor, if you’d like to stay. Sometimes if the selling doctor remains on staff—even part-time—that can make for a very seamless transition.
Even if the previous doctor stays on, you should anticipate some loss of acquired assets when it comes to patients. That’s why it’s important to have a marketing plan in place so you can build your own patient loyalty without relying on the previous doctor’s success.
Adding the Teeth Whitener to Your Practice
You are just about ready to buy or sell. Congrats! There’s one more step to consider when it comes to buying or selling a dental practice.
Let’s talk capital expenses. As the buyer, you don’t want to have to ask for them and as the seller, you don’t want to have to provide them, but having a ‘Standard of Care with your equipment and facilities is crucial.
Standard of Care means the practice has vital up-to-date equipment and facilities. If your practice is outdated, the buyer can come in at a lower offer at negotiation because there will be immediate expense strain for new equipment.
But don’t head out on a shopping spree just yet. Revenuewell said it best with “The most important aspect of technology adoption is the understanding of the value received versus the price paid for the service.” In other words, don’t equip your practice with top-notch CAD-CAM systems if you don’t have a designer who knows how to use it.
There have been significant advances in dentistry including the availability of digital impressions, intraoral scanners, intra-oral digital x-rays, and desktop milling. Practices in your field of specialty will no doubt carry this type of equipment, so make sure if you need it, you have it before you buy or sell.
CONCLUSION
Buying or selling a dental practice doesn’t have to be like pulling teeth. Unless you’re really good at it. Then it can be like pulling teeth. The main thing to keep in mind is neither party wants to be surprised when it’s time to sign. Make sure you have consultants available to go over all the paperwork, (lawyers, accountants, sales agents, investment advisors, etc), and that both parties are happy with the outcome.
You are embarking on a new adventure and it’s a time of celebration. Purchasing a new practice gives you not only the advantage of a veteran business but also a chance to make it your own. As the seller, it’s time to retire, move on to greener pastures, or start anew. Whatever category you fall in, you are now equipped to make the most of this new opportunity.
