Thinking of selling your dental practice? Here are the key considerations to keep in mind to ensure the process is smooth and successful.
Before you put up a "For Sale" sign, be sure to consider both the emotional and financial impact of the sale.
At some point you’re going to sell your dental practice—whether it’s for retirement reasons, a desire to refocus your career on the business side of dentistry, or simply assume a less demanding role in running a practice.
If you’re contemplating selling your dental practice, there’s a lot to consider. For starters, it’s not the same as selling a home.
“Nothing is going to be published saying my dental practice is for sale, and all bidders welcome,” says Jeffrey Rust, a partner in the corporate and health services practices groups at Rivkin Radler. “The goodwill of the practice is something you want to maintain,” Rust explains. “No dental practice wants the marketplace to know its up for sale. Especially if the sale does not occur.”
So, what’s the process?
Sounds simple, right? The goal is to sell the practice. But in reality, it’s more complicated than that.
For example, is the sale a result of retirement plans? Or are you looking to stay on as an employee of the acquirer? Or, is obtaining maximum value for the practice the most important consideration?
Once you understand your goal, you’ll need to have a practice valuation done. In doing so, Rust explains it’s not only important to understand the value—the net income—of the practice today, but to consider the value of the practice under a dental service organization, or a large group practice.
“You need to consider the efficiencies that you will benefit from both in pricing on supplies, technology and equipment, and possibly in negotiating leverage with commercial dental payers,” he says.
In addition, it’s important to analyze and normalize expenses. A small dental practice or dental group might own the office or building in which it practices and, in effect, not pay any rent. That needs to be taken into consideration.
It’s also very common for a dental practice to have a spouse or other family member serving as the office manager, and that person is being paid above market compensation.
“It’s often a surprise when a buyer comes in and says, yeah, your spouse is a great office manager, but we’re not going to pay this person $250,000 a year,” Rust says. “So it’s important to normalize expenses under a more structured corporate model.”
Rust recommends have a representative, such as an agent or broker, involved in the selling process to help market the practice, and negotiate on behalf of the practice some of the basic, non-legal, economic terms of the sale.
“In my experience, a broker will identify potential buyers through their market analysis, and approach them directly but on a confidential basis,” Rust says. “They won’t disclose who the selling practice is.”
Essentially, the agent or broker will provide potential purchasers with a financial disclosure indicating a practice is considering a transition or sale. But it also happens that a dentist may negotiate directly with a DSO or dental group that approaches them.
“In any event, having a representative engaged is optimal,” Rust says.
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One potential obstacle to a smooth sale and transition is the emotional factor, which Rust says is common. And given that many dentists who have been in practice by themselves for 20 or 30 years, and may even have staff who have been with them all that time, it's not surprising that they have established a culture. What impact will the transaction have on the practice culture, and on the staff?
“I’ve seen staff ask the dentist not to do a deal because they weren’t comfortable with the successor,” Rust says. “Emotion can also add an additional value in the mind of the dentist that might not be realistic. It can definitely be an impediment to getting a deal done.”
If you plan to stay on as an employee within the new practice structure, Rust cautions that you understand the compensation.
“If you’re engaging with a DSO, these formulas can be very complicated.”
Also, consider the non-compete clause in the sale.
“If you stay on as an employee and you’re unhappy, you’ll be stuck because you won’t be able to practice in your market for a period of time,” Rust says.
And, he adds, if you do stay on as an employee for a period of time, how much control you retain in the day-to-day operations of the practice? Will you be able to control staffing decisions? Will you have a say in what supplies, budgeting and technology decisions are made?
“These are all critical in contributing to what you’re able to earn under your compensation model,” he says.