Steps to Take When Selling Your Dental Practice

May 10, 2022

Steps to Take When Selling Your Dental Practice

Kudos! You have worked hard, and it’s time to start planning to sell your practice. Whether you are thinking of selling in a year, or ten years, now is the right time to start planning. This is an emotional time, and the process can be stressful, but building the right team around you can ease the burden and allow you to focus on what’s most important: yourself, your family, your patients, and your staff. Below is a list of who we believe are the most important players you should consider adding to your transition team.

The Right Buyer: More important than the deal is the person in the deal. This mantra is perhaps most appropriate when applied in the context of finding someone to carry on the legacy you have worked so hard to establish. If you associate with good people, good things tend to happen, and vice versa. Be patient; don’t sell your practice to the first willing buyer to knock on your door, waving a check. Take the time to meet potential buyers in person, and get to know their values, their work ethics, their clinical skills. After all, you will promote them to your patients and staff as someone whom you trust and who will continue to provide the level of service they have come to expect.

You have many options to consider when looking for the right buyer:

1. Associate: Hire a recent graduate as an associate and include a future arrangements clause into the employment agreement giving them the right (not the obligation) to purchase the practice in X years. If you want to keep your options open, you may give them the right to “discuss the potential to purchase” in X years. It is important to be honest and communicate your intentions with the associate from the start. This will give you, your staff, and your patients a chance to evaluate their clinical skills, personality, and ethics. It will also give the potential buyer a chance to evaluate you and your practice and decide if this is an opportunity worth pursuing. Though nothing is guaranteed, this is the easiest and most efficient way to ensure a smooth transition to the buyer. Of course, this approach only works if there is enough demand for services to justify the addition of another doctor. If there is, you will have a good shot at a successful transition, and your revenues should increase from the new doctor’s production during the associateship period.

To find an associate, post a job to the local dental association, dental school, or other job posting platforms, and you may post an ad on our Collier Connections website. When posting, be sure to advertise that the job is a short-term associateship leading to ownership.

2. Post the Practice for Sale: Post the practice for sale with the local dental association, dental school, or other platforms. Be sure to draft a narrative that paints an accurate picture of your practice while avoiding specifics that could tip off the surrounding community (and referral sources) of your pending retirement. Search the above-mentioned platforms to get a feel for the language other sellers are using.

3. Broker: Hire a dental practice broker to find a buyer for the practice. They will typically utilize the same resources mentioned in option 2 above, so you may consider posting the practice yourself before hiring and paying for a broker. (More on brokers later in this blog)

4. Neighbors: You may consider reaching out to neighboring dentists or a dentist in your local study club whom you trust to have discretion. A local dentist may be interested in your patient base, your location, your equipment, or all the above. Choose someone whose reputation you know and someone who is already established in the community. Knowing that your patients will be taken care of by someone you trust and respect can help put your mind at ease. This option is worth considering if you have had difficulty finding a buyer or if you know of a local dentist who is looking to expand.

5. Do Nothing: This approach is not for everyone and should only be considered when all other options have been exhausted. If you have not found a willing buyer and you are close to retirement, you may consider working a few more years, then closing shop. Depending on the size of your practice, it may make economic sense to work these extra years to earn what would have been the practice sale price while simultaneously delaying dipping into your retirement funds. Any sale of assets, patient lists, or goodwill after this will be a bonus. But, you will need to make arrangements for your patients’ care.

Dental Specific Attorney: The foundation of any practice transition is in the legal documents. You may be tempted to save a few bucks drafting the documents yourself by using a template from the internet or recycling documents from a colleague’s “similar” transaction. Doing this could potentially lead to devastating financial consequences and expose you to personal liability. This is not intended as a scare tactic; our goal is to educate our readers to avoid common pitfalls. No two transactions are the same, and it is a mistake to think you can do it on your own. A dental attorney can help you establish the proper entity (if applicable), draft the legal documents to effectuate the transaction, negotiate on your behalf (so you and the other party can avoid conflict and preserve your cordial relationship), and ensure that your practice and personal matters are in order. A dental attorney will determine the most appropriate transition structure for you and the buyer based on your unique set of circumstances and expressed goals.

Dental Specific CPA: Equally as important as having the right attorney on your team is having a dental specific CPA. Your CPA can work with you to determine the best allocation of the purchase price to help you save taxes and can help you avoid other potentially devastating financial mistakes. Your CPA will also file various tax forms on your behalf following the sale to ensure IRS compliance.

Broker: Hiring a practice broker is optional. Brokers provide several benefits that may be appealing to doctors, but their services are not essential to the success of a dental transition. As mentioned before, a broker can help you find a buyer, seller, or new employee. Brokers also serve as a middle person between clients, attorneys, lenders, and other parties involved in the process. Brokers can help move the process along and keep everyone engaged and motivated. It makes sense, considering they do not get paid until the transaction is complete. For their services, brokers will collect a fee anywhere between 5-10% of the sale price.

If you are considering engaging the services of a broker, make sure to have the broker agreement reviewed by your attorney prior to signing it. Often, the agreement will include a clause that gives the broker the right to collect their fee if you close a transaction within a specified amount of time (typically 2 years), regardless of whether they actually introduced you to the buyer/seller. Brokers typically charge their fee to the seller, but some brokers wish to split the cost between both parties. We strongly disfavor arrangements where both parties split the cost. Similar to attorneys, brokers have a duty to represent their client’s best interests. It creates an automatic conflict of interest if the broker is being paid by both parties. There is no way for the broker to fairly represent one party over the other.

Dental Specific Appraiser: You should find an independent, unbiased appraiser who is experienced in dental transactions. There are dozens of acceptable appraisal methods to determine a fair value for dental practices, and the methods vary depending on the potential buyer. Appraisers have a great deal of subjectivity in determining the value of your practice. Therefore, it is important to find an appraiser with a strong track record of supplying accurate, fair, and unbiased appraisals.

Side note: Appraisers typically use the average revenues and profitability from the past three years of practice data. If you want to maximize your practice’s value, you should make a concerted effort to boost practice revenues and reduce overhead starting today, especially if you plan to retire in more than three years. There are thousands of practice consultants out there who claim to be able to help you improve practice profitability. We have not worked with any such consultants, and, as such, we cannot recommend anyone in particular.

Real Estate Attorney: Real estate laws vary significantly from state to state and even town to town. For this reason, it is crucial to hire a local real estate attorney who knows the market in your area and can help you draft and negotiate the real estate documents. Real estate attorneys can help you determine fair market value for your building if you wish to sell or reasonable market rent if you plan on leasing the space.

Banker/Financial Advisor: Odds are that when you sell your practice, you will be handed the largest check you have ever seen. So, what do you do with all that money? Having an established relationship with a banker and/or a financial advisor will allow you to make the right decision based on your unique financial circumstances and your personal/family goals. Your practice sale will likely be the single largest contribution to your retirement fund. Your advisor can help you allocate it among various retirement vehicles to ensure that you and your family have a long and prosperous retirement. You’ve earned it. Your advisor should know you well and should have your best interest at heart. If you do not already have an advisor, find one and let them get to know you and your goals.

Side note: If a potential buyer is a young doctor and is having trouble finding a bank to loan the funds, your banker may be willing to take the risk because they know the practice’s potential and trust that a buyer will succeed.

 

What steps do you plan to take in preparation of your practice transition?

LEARN MORE ABOUT OUR UPCOMING PRACTICE TRANSITIONS SEMINARS

Rockport, ME – Aggressive Business, Tax & Practice Mgmt. Seminar

WHEN: Sept. 20-22, 2024
WHERE: Samoset Resort On The Ocean

Monterey, CA – Retired Doctors Seminar

WHEN: Nov. 8-9, 2024
WHERE: Monterey Plaza Hotel & Spa

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Collier & Associates, Inc. provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act on this information without seeking advice from professional advisors.

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LEARN MORE ABOUT OUR UPCOMING SEMINARS

Rockport, ME – Aggressive Business, Tax & Practice Mgmt. Seminar
WHEN: Sept. 20-22, 2024
WHERE: Samoset Resort On The Ocean
Monterey, CA – Retired Doctors Seminar
WHEN: Nov. 8-9, 2024
WHERE: Monterey Plaza Hotel & Spa