Death and the dental practice

February 27, 2018

No one likes to think about it, but do you have a plan in place if the unexpected happens?

The death of a dentist is a tragic event, affecting the friends and family who are left behind. But besides the devastating impact from a psychological stand point, the financial impact also creates an unwanted outcome almost immediately.

If the dentist was typical of the norm, he or she provided a fairly high income for his or her family. As the early years’ struggles were overcome and the income became higher each succeeding year, the family became accustomed to the lifestyle that the income provided.

Related article: Why understanding professional fees is critical for dentists

If the practice was operating as a sole ownership type - whether incorporated or not - the value of the practice probably grew each year. With many dentists, the value of the dental practice became one of the assets owned with the most financial worth and most potential continued growth in equity. On many financial reports, the dentist may have used the value to assist in securing loans, expansion of the practice and in building a retirement nest egg.

When death comes suddenly

One of the most horrible consequences of the death of the dentist is the resultant immediate decrease in the value of the practice. When there is little or no planning time because of the possible youth of the dentist, the ability to acquire the assets necessary for the well being of the family is diminished rapidly.

The younger the dentist when deceased, the more likely that the value of the practice will not yet have peaked, even if the income of the practice was quite high. Learning to live on less is a difficult proposition for the widow or widower of the dentist. Let’s look at some facts that occur when the death of the dentist occurs.

The timeline

Unfortunately, there are at least two negative financial consequences from the death of the dentist. The first is that the income that the spouse and family have become used to living on will drop as the receivables are collected and there is little or no continuing work done by the hygienists or other professionals still permitted to practice at the dental office.

Related article: Transitioning a dental practice after death

The second financial problem is that as the gross revenue decreases, the value of the dental practice to a potential buyer drops significantly. Any practice valuation prepared by a professional would use the most current data when analyzing value. As the receipts fall, the net income will fall more dramatically, because if the practice continues operating, employees are still needed and they must be paid.

 

Rent is required, as are almost all of the fixed expenses of the dental practice such as payments on equipment, utilities and other operating costs.

The value of the dental practice is most likely at its highest about the time that the passing of the dentist occurs. As the expenses continue and the gross revenue decreases, the practice value will drop precipitously. It is critical for the surviving spouse and the estate to sell the practice as quickly as possible if there are no professionals to step in to keep the revenue anywhere near its high point prior to the dentist’s death.

Find an expert

The widow or widower probably has no idea of the intricacies in running the practice. Finding a dentist to hire to continue the practice’s operations will be a very difficult task. The surviving spouse will be at a loss as to what steps to take to preserve what ever value is possible. If at all possible, the dental CPA is the best person for the estate to contact to assist in keeping the practice in the best position so that a transition can occur with the least financial damage. The dental CPA can help to find an honest broker to aid in selling the practice. The continued operations can be at the highest level with the dental CPA using his or her contacts to secure the continuity of the practice while the practice is being marketed for sale.

Related article: Why due diligence is essential when it comes time to sell your practice

In the event there is no relationship with a dental CPA, a practice broker should be contacted. The potential for the estate lawyer to assist is the next option. Unfortunately, most attorneys have little to no background in working with dentists, so relationships by the lawyer with dental professionals may be limited.

The key to maximizing value

For the estate to maximize its value from the sale of the dental practice, the old adage of “the sooner the better,” is an absolute must. Every day that goes by creates a loss in value to the practice without a revenue producer.