As practice brokers, we often receive a call the day a dentist decides to sell their practice. In some cases, this phone call is the first time the practice owner has given serious consideration to the value and marketability of their office. Unfortunately, the doctor’s lack of foresight and planning has resulted in making choices (or failing to make choices) that resulted in a substantial adverse impact on the value and/or marketability of the practice in the years leading up to the sale. Nobody enjoys telling someone their “baby is ugly” but that is sometimes the position in which we find ourselves due to a lack of proper transition planning on the seller’s part.
With the Baby Boomer generation reaching retirement age, a large wave of sellers will be taking their practices to market over the next five years. With a substantial increase in the inventory of practice acquisition opportunities, it’s imperative to take the following steps to stand out from the pack and ensure that your office is as valuable and marketable as possible when the time comes to begin looking for a buyer:
- Keep your foot on the gas. Your revenue level is one of the key factors impacting practice value, as the value of most dental practices falls in the range of 60%-80% of annual revenue for the most recent year. Revenue trends are also an important indicator of the overall health of your office. If you are planning to cut your work schedule, consider hiring a part-time associate doctor or accelerating the date of your practice sale.
- Monitor and control your overhead. Profitability is a prerequisite for value, as net cash flow (revenue minus overhead) is the single most important driver of practice value in the minds of buyers, their advisors, and lenders. Are your major overhead expenses in line with the following benchmarks?Staff Salaries/Benefits 25%-30% of Revenue Occupancy Costs (Rent/Utilities) 6%-10% of Revenue Dental Supplies 5%-6% of Revenue Lab Fees 6%-10% of Revenue Advertising/Marketing 2%-5% of RevenueWe all know that overhead only seems to increase over time. If practice revenue is declining while overhead is increasing during the years leading up to a sale, it will undoubtedly cause massive erosion in the net cash flow and value/marketability of your practice.
- Consider updating your office décor and equipment. The appearance of the office and age and quality of the equipment/ technology is increasingly becoming a hot button among buyers. Is the appearance of your office congruent with the quality of your dentistry? Buyers and patients often believe this is the case. Therefore, if your time horizon for selling is more than three years away, it is wise to consider investing in digital radiography, updating/upgrading your computers, server, and practice management software, going paperless, and reupholstering your patient chairs. If a practice sale is in the nearer future, you should forego any major equipment purchases but consider updating the aesthetic of your office (new paint, change carpet to laminate wood flooring, update furnishings/décor, etc.). Enhancing the “curb appeal” of your practice can go a long way in improving its marketability.
- Evaluate and raise your fee schedule as needed. Your fee schedule plays a vital role in the profitability of your practice. Raising your fee schedule on an annual basis will help to combat rising overhead costs and allow you to maintain/increase the net cash flow of your practice.
- Clean up accounts receivable & credit balances. Many practices have a large balance of > 90 days accounts receivable due to uncollectable balances that have not been written off. It is important to clean up your accounts receivable and credit balances prior to beginning the transition process to avoid giving buyers the impression that your practice has an issue with collections.
- Reduce discretionary write-offs on practice tax returns. In the years leading up to a practice sale, it is wise to instruct your accountant to reduce aggressive tax write-offs (such as running personal expenses through your practice financials) so that potential buyers and their advisors can easily determine the true overhead and profitability of your practice.
- If you have an associate doctor, make sure you have an associate agreement with a non-compete in place. If you are planning to sell your practice to your associate, it may be time to establish a formal agreement regarding the future sale date and price for the practice.
- Consult your financial advisor and tax accountant. How much money do you need to retire? How much retirement savings do you currently have on hand? What are the tax consequences associated with the practice sale?
- Be realistic regarding the time it will take to sell your practice. Practices typically sell much faster in metropolitan areas (3-6 months) versus rural areas (1-2 years or more).
- Meet with an experienced practice broker or transition consultant to discuss transition strategies and have a practice valuation completed in advance of the sale. A practice valuation can serve as a valuable tool in identifying areas where you can increase the value of your office in the years leading up to the sale.
By planning ahead and taking the above steps, you can rest easy knowing that you will be in the position to maximize the value of your practice when it’s time to begin the transition process.