Perhaps the time has come for you, a dental practice owner, to take stock and decide if the time has finally, maybe, come to sell your dental practice. In the miasma of that scary, exciting, and daunting prospect, sellers may wonder what they can do now to help the sale process run as smoothly as possible while also maximizing the value of their practices. To that end, discussed in this article are five important things to consider when selling a dental practice.
1. Personality Fit
Especially for long-established sellers, a dental practice is like a child that embodies years of nurturing and toil. It is understandably difficult to consider severing that emotional umbilical cord. In the same way that it is important what kind of mentor will shepherd the child when it leaves the nest, it is important to consider what kind of buyer will take over the practice when it’s sold. If this is a consideration, then steps must be taken to ensure that the buyer’s practice philosophy and values align with the seller’s. The best way to do this is for the seller to make a personal connection with the buyer. As much as the process will allow, the seller should meet with the buyer during the preliminary negotiations, preferably away from the office setting, to get to know the buyer and get a feel for what the buyer is like. It seems so simple because it is. But in my experience, the most difficult transitions and the transitions most ripe for post-closing problems are those where the parties have fundamentally different approaches to the practice and the business of dentistry. This, in turn, leads to greater patient attrition and a breakdown in practice operations. In other words, an unhappy child.
2. Whether to Keep Working (for the Buyer or Anyone Else) after the Sale
The sale of a dental practice may be an end but realize that it is also beginning. The question will arise for the seller at some point in the process while pondering the new phase in life that’s about to begin: What am I going to do with so much free time? For some the answer comes easily and involves the usual suspects: travel, golf, time with friends and family, nothing at all. But if the seller worries about boredom, it is best to determine at the start of the sale process whether the intent is to stay on with the buyer as an associate after the sale or keep options open to work for, or perhaps even purchase other practices.
The seller’s post-sale plans will be a key piece of sale negotiations for both parties, as the buyer will want to determine (i) whether and how long to employ the seller after the sale to help with the transition, and (ii) the scope of any restrictive covenants of non-competition and non-solicitation under which the seller will be bound after the sale. These items will essentially determine the seller’s working options for at least the first few years after the sale, so the sooner the better for the seller to determine those future plans and thus how much leeway will be necessary to negotiate in the purchase agreements.
3. The LEASE, the LEASE, the LEASE
Assuming the seller does not own the underlying real estate, the lease for the practice space is foundational though often forgotten. Everything in the sale of a practice is predicated on it. The buyer’s lender will not finance the purchase without the buyer securing a lease or lease assignment for at least the same number of years as the acquisition loan term. No space, no practice.
At a minimum, the seller needs to know the general parameters of its lease:
- What is the rent and how much will it increase over the life of the lease?
- How many years are still under the seller’s control?
- How many renewal options are available and what are the deadlines for renewal?
- What are the lease assignment provisions in the event of a sale of the practice?
- Are there any special hoops that the seller has to jump through to get the lease assigned?
Note that there are often potential pitfalls buried in the lease assignment provisions. For example, some leases provide that if the tenant (i.e., the seller) requests an assignment and the landlord says no, the landlord then has the option to terminate the lease. Again, no space, no practice.
Landlords are in many ways the silent majority partner in the purchase and sale of a dental practice, with their own timelines, protocols, and motivations. Therefore, it is nearly always best to get the landlord involved as early as possible when selling a dental practice. When pushed up against the limits of a lease because of poor planning, the seller may give up more leverage in getting the deal done.
There are some common housekeeping items that will go a long way toward ensuring the marketability and value of a dental practice.
If there are associates, are they under contract? A buyer may walk if the seller employs associates who are not subject to easily transferable contracts and/or restrictive covenants. It’s a good idea to get associates under written contracts and include provisions that allow the seller to simply assign those contracts to a buyer in the event of a practice sale.
The seller should know if there are any liens covering the practice assets and be able to provide supporting information and payoff letters for them.
The seller should make sure the practice entity is active and in good standing in whichever jurisdictions it is registered. The purchase agreement will require as much, and curing any delinquency can take time and cost hundreds if not thousands of dollars. It is best to do this ahead of time.
The practice books and records will tell the tale. If the books are poorly done, even if they are accurate, it will scare off a buyer. This is especially true with accounts receivable. If the seller doesn’t know how much is coming in, what the collection rates are, and how much is still left out there, how can the seller possibly convey that to the buyer? Similarly, the seller will need to know the credit balances showing on patient accounts for refunds, insurance overpayments, insurance adjustments, and the like. These are the kinds of details that can kill a sale at the eleventh hour. For that reason, in the run up to putting the practice on the market it is a good idea for the seller to hire a practice management consultant such as Malika Azargoon [link to her bio?] to conduct an internal practice audit. The audit will assess where the practice is now in these key indicators and what the seller needs to do to improve them.
The audit process is also a good opportunity to assess overhead, trim any fat, and tighten expenses to maximize earnings and efficiency.
5. Ramp Up, Not Down
This last bit of advice may be the toughest to hear because it flies in the face of the natural order of things. Normally the cycle of the business owner is shaped like a parabola – intense and rising work in the early years, cresting with success as the business builds and sustains, then coasting downward into later years as the owner begins to move away from running the business day to day and towards enjoying its fruits. Fair enough. Unfortunately, as well-earned as this respite may be, the time before selling a practice is the time to work the hardest. A dental practice is only worth what it’s worth now and its value is based on the most recent years. A seller may insist it’s a million-dollar practice when in reality it was a million-dollar practice three years ago before the seller cut back to two days a week. Now it’s a $750,000 practice.
In short, in order to maximize the sales price and enjoy those fruits well into retirement, the last two to three years should be the hardest a seller has ever worked.
This may seem daunting. Pulling in an expert to help advise and navigate as you plan for this transition will save you headaches, heartaches, and resources.