Over the years, we have heard many myths regarding practice transitions that doctors mistakenly accept as facts. We feel that it’s our responsibility to dispel the following urban legends so you can make smart decisions when planning your practice transition.
MYTH: Practices are typically valued at and sold for with 5+ ops in a high visibility location, FFS patient base, 100% of collections. low overhead, etc. Otherwise, the practice value will
FACT: While it is currently a sellers’ market in most of the most likely fall in the normal range discussed above. country, dental practices typically sell for 60%-80%. Hopefully, by dispelling these myths, we have given you the most recent year’s annual revenue. However, rule some valuable, real world insight into several factors of thumb valuations solely considering annual revenue involved with a practice sale so that you can make an are just that, a rule of thumb. You should be skeptical of educated decision when the time comes to plan your any practice broker who attempts to establish an asking practice transition. price for your practice based solely upon one factor or another. A formal and accurate valuation that takes all aspects of a practice – annual revenue, net cash flow, type of patient base and dentistry, location, quality of equipment and facility, etc.
MYTH: The practice will lose 30% of the patient base immediately following the sale.
FACT: While it’s true that practices will lose “some” patients following a sale, the amount of patient attrition is typically far less than 30%. Assuming the buyer is a good fit for the practice and the transition is handled properly, the typical attrition rate is closer to 5%-10% of the patient base. Many of the departing patients are typically friends and family members of the selling doctor who don’t live near the office. While these patients may decide to find a new dentist closer to home following the sale, they are typically replaced by the friends and family of the new practice owner.
MYTH: The seller needs to continue working in the practice for at least 3-6 months following the sale in order for the transition to be successful.
FACT: Each situation and practice is unique. However, a large number of our transitions are structured as “walk away” sales where the seller does not step foot in the office following the closing date. Even with that type of transition structure, patient attrition is minimal so long as the buyer is a good fit for the practice and does not make any abrupt changes to the office. It’s also important to note that it takes a significant shift in the mentality of the selling doctor (from an owner to an associate) in order for the seller’s continued presence in the office post-closing to have a positive impact on the transition. If the seller has the right mindset, staying on following the sale can help with patient and staff retention, especially in a fee- for-service practice where the selling doctor has a magnetic personality. On the other hand, a seller who is reluctant to relinquish control of the practice to the new owner can have a negative impact on the transition. On average, the typical practice transition involves the seller sticking around for 4-6 weeks post-closing to ensure a smooth transition of ownership and maximize patient retention.
MYTH: My associate doctor is going to buy the practice.
FACT: This sounds like a great idea in theory; however, the ADA estimates that 75% of associate buy-ins fail prior to fruition. Oftentimes, these relationships fail due to an incongruence in practice philosophy, lack of busyness, timing (the seller is not ready to sell when the buyer is ready to buy or vice versa), or a differing opinion regarding the value of the practice – just to name a few. If you are planning to sell your practice to your associate doctor, it’s important to have an employment agreement (with a non-compete) in place and to formally agree on the principle terms of the sale (closing date and method of determining the price) early on in the relationship.
MYTH: The landlord will release me from liability under the lease upon the sale of my practice.
FACT: The vast majority of the time, the landlord will require the original tenant to remain liable for the lease until the expiration of the current lease term. Therefore, unless your lease explicitly states that the landlord is required to release you from liability upon assignment, you will likely be required to remain liable for the lease until the expiration of the current lease term. If you will be negotiating a new lease or lease extension prior to the sale of your practice, it’s imperative for you (and your advisors) to pay attention to the assignment provisions. If possible, you should attempt to negotiate a clause that requires the landlord to release you from liability upon assignment of the lease.
MYTH: The Seller will need to finance all or part of the practice purchase price.
FACT: There are several nationwide dental lenders and numerous local/regional banks that provide 100% conventional financing for dental practice acquisitions. Seller notes are typically only required in situations where there is a perceived risk that the bank is trying to mitigate, such as a buyer’s lack of experience/production history, a declining revenue trend, the seller owning another practice nearby, or the seller asking for a premium price for the practice. If you are selling real estate in conjunction with the sale of your practice, it is relatively common for the buyer to ask the seller to hold a note for 15%-20% of the real estate purchase price since most banks do not provide 100% financing on real estate.