The Ultimate Seller’s Guide to Sell a Dental Practice
Selling a dental practice can be a complicated and emotional endeavor, as most practice owners have spent years owning and operating their practices and building relationships with patients and staff members. However, when equipped with accurate, data-driven knowledge and a team of specialized and caring professionals, you can set yourself up for a smooth transition out of practice ownership and into the next stage of your life.
Who is your Buyer?
These days, there are multiple types of buyers out there. For instance, a “traditional” buyer is someone who will come in, take ownership of the practice, take over all the dentistry in the practice, and take over the operation and management of the practice. This is the simplest, most straight-forward type of practice transition. However, there is also the multi-practice owner buyer. This type of buyer will most likely want you as the seller to stay on as an associate post-closing to provide dentistry in the practice. The multi-practice owner will usually take over the operation and management of the practice, and may bring in other dentists, including specialists, but will usually want you to stay on for at least a year or two. Finally, of course, for bigger practices, especially with multiple providers or locations, a DSO/private equity buyer might be interested. A DSO/private equity buyer will almost certainly want a seller to commit to staying on for at least 3-5 years post-closing to continue to provide dentistry. Like a multi-practice owner, the DSO/private equity buyer will take over the operation and management of the practice. Have a discussion with a professional about who your likely buyer or buyers might be.
Timing and Planning
Ideally, a practice owner should start thinking about selling his or her practice at least 3-5 years ahead of time. However, we understand that type of planning is not always possible. Sometimes events necessitate a sale. Sometimes a practice owner wakes up and realizes that now is the time – and that is perfectly fine. Some other factors you might need to consider when thinking about timing are whether you want to keep practicing post-closing and to whom are going to sell your practice? For instance, if you have a smaller or medium sized, one-dentist practice, but want to keep practicing after you sell, you are probably going to want to consider selling to a multi-practice owner who will want to/need to keep you on as an associate after closing. If you have a larger practice and want to keep practicing after you sell, you might want to look at what some of the DSO/private equity groups can offer. If you want to ease out of your practice relatively quickly after selling your practice, then you are probably going to want to consider a traditional sale to a dentist who will take over the dentistry in your practice as well as the operation of your practice. Sitting down with a professional to think about all of these options is critical.
Practice Valuation
The value of a dental practice is what someone is willing to pay for it. Probably the two biggest factors in determining practice value are cash-flow generated by the practice and location. Again, think about who your likely buyer is. What a traditional buyer is able and willing to pay is probably going to be different than what a DSO/private equity buyer is going to be able and willing to pay. Of course, how you get paid is very important too. Practices are going to be valued differently depending upon whether the target buyer is a traditional buyer, a multi-practice owner or a DSO/private equity group. However, all practice valuations have at their core the first factor set forth above: the goal to show how much money is flowing through the practice and is “available” to an owner. Generally, the more income available to an owner, the more valuable the practice is. The terms “adjusted net income” and “EBITDA” are often used. EBITDA stands for earnings before interest, taxes, depreciation and amortization. All of those things are “deductions on tax return.” Adjusted net income takes that analysis even further and considers what other discretionary expenses do you have? Things like auto expense, continuing education, meals, entertainment, personal health insurance, family members on the payroll, etc., are all discretionary expenses that are income available to an owner. A buyer, and a lender if there is one involved, will want to see what sort of income they can make in the practice after the sale. The second factor noted above, location, is also critical. There are some very profitable, very nice practices that are in rural areas. However, the reality is that those practices are typically not as highly valued as practices located in more urban and suburban locations. The reason for this goes back to the first line of this section. Practices are worth what someone is willing to pay. And, unfortunately, there are just far more willing and able buyers looking for practices in suburban or urban areas than there are buyers looking in rural areas.
Dental Brokers and other Dental-Specific Professionals
When you are getting ready to transition your practice, having the right team of advisors will make the process go a lot smoother. Whether you are contemplating selling your practice to a traditional buyer, a multi-practice owner or a DSO/private equity buyer, using a dental broker will ensure that: you have all the information necessary to make an informed decision, you are reaching the broadest – but correct – buyer audience for your practice, you are getting the top valuation possible, and that issues involving how you are paid, when you are paid, how you are taxed, and what are the post-closing arrangements, if any, are all addressed to your satisfaction. In transactions involving a DSO/private equity buyer, this is especially true as “enterprise value” is determined, and terms such as earn-outs, contingent payments, roll-over equity, and others are very significant. Using a broker will get you the best deal possible. In addition to a broker, you will want to inform your accountant, your attorney and possibly your financial planner about an impending transition. If you need referrals to professionals who work regularly with dentists, do not hesitate to ask your broker.
Marketing the practice for sale
Marketing the practice is critical. Most experienced brokers will have a process in which they contact buyer candidates they know who are seriously looking and who might be a good fit, and then broadening the marketing to other candidates in their database, and then marketing the practice more publicly via a website or other means. Keep in mind who the target buyer is, though, as you probably do not want to be marketing so broadly if you would like to see what a DSO/private equity buyer can do. And, conversely, if you are looking for a traditional buyer, your broker will not be reaching out to DSO/private equity buyers. Discuss with your broker how much detail, including location, you want to share with potential buyers, and discuss the confidentiality and non-disclosure agreements potential buyers will sign. Discuss what happens when there is interest in the practice. When are showings scheduled? Does your broker show up at the showing? Do you?
Letter of Intent
Once there is a buyer who is ready to move forward, the first document the parties sign is typically an offer letter, commonly called a letter of intent. This document is typically relatively simple and sets out the basic terms of the transaction and a time-table by which the different parts of the transaction will happen. For instance, a LOI typically sets forth the price, an earnest money deposit (refundable if contingencies are not met), projected closing date, and contingencies such as a financing commitment, completion of due diligence to the buyer’s satisfaction, and signing a binding purchase agreement. Plans for the lease or sale of the real estate are also typically addressed at this point.
Negotiations and Practice Purchase Agreement
The binging agreement between the parties is a practice purchase agreement. This agreement will set forth all details agreed to in the letter of intent, and additional details about purchase price allocation, collection or sale of accounts receivable, work in progress, transfer of patient records, indemnification, re-work, employees, assumed contracts, and other items. Exhibits to the purchase agreement often include a bill of sale, a records agency agreement, a non-competition/non-solicitation agreement, and other agreements. If there is a sale of real estate involved, there will be a separate agreement for that. If you are the owner of the real estate, but are leasing the practice space to the buyer there will be a separate lease between you and the buyer. If you are assigning your existing lease, there will be an assignment of lease agreement between you and the buyer and the landlord. It is important to have an attorney working for you who does these sorts of transactions often.
Closing and Transition
This title can be a little misleading because some of the transition can happen and should happen prior to closing. Once the purchase agreement is all set and all the contingencies are satisfied, then we suggest telling the staff two-three weeks ahead of the closing. Not all brokers agree on this strategy, but we have found it to be effective. The staff should meet the buyer soon after being informed of the upcoming transition. It is important that the staff start to get to know the buyer and be reassured that the buyer cares about them and the continuity of the practice. Prior to closing, the staff can assist the buyer with credentialing (if the practice participates with insurances for patients), vendor lists, transfer of the practice management software, setting up utilities accounts, and other logistics. The buyer and the seller can discuss cases the seller will need to finish up post-closing and cases that the seller is saving for the buyer. In some cases, the seller will stay on post-closing to perform dentistry for the buyer, and if that is the case, there will need to be an employment or professional services agreement. The seller will draft a letter to patients, which announces the transition and introduces the buyer (the broker can assist with this letter). The seller and buyer may plan to meet weekly or keep in touch via telephone or email or text post-closing for some period of time. It is generally in both parties’ interests to have as smooth as transition as possible.
Final Remarks
While selling a dental practice can be a daunting task, it is also a very exciting time! With an experienced broker and a dental-specific team to assist you it can be a smoother, more enjoyable process. Ask your friends and colleagues about their experiences but remember everyone’s practice and transition goals are different. Likewise, ask your colleagues which professionals they used, but also feel free to ask the professionals you are considering for referrals. The advice you get before, during, and after the process is critical to you having the best transition process possible.