Preparing to sell your practice or purchase one? Read this first.

July 12, 2012

The current outlook suggests that while there is an abundance of qualified buyers available, quality dental practices on the market are lacking.  

The current outlook suggests that while there is an abundance of qualified buyers available, quality dental practices on the market are lacking.

 

Just as large corporations provide quarterly updates to their stockholders and the general public, we at Professional Transitions would like to give you a periodic update to keep you informed of the state of the dental economy as it relates to practice transitions and the seller marketplace.

While its important to remember that there are always variations when it comes to a specific market, we are attempting to share with you a national overview.

General Dental Economy
The first half of 2012 has continued to show improvement in the dental industry as the economy recovers. Though still fragile and somewhat dependent on international economic conditions, indications are that slow growth and improved stability will continue. The stock market has recovered, to a great extent, from the losses incurred during the recession and though still somewhat volatile, seems to have stabilized with Q1 earnings showing slow growth. Though many dentists lost significant portions of their retirement portfolios, some, if not all, of those losses should have been recovered.

Buyer Availability
Many parts of the nation seem to be never lacking in qualified buyers, especially in the larger metropolitan and growing areas. While other areas may have less, there are qualified purchasers in every part of the country.

For clarification, qualified buyers are individuals that have some actual practice experience, which may include GPR or other residency programs or associateships. The primary qualification however continues to be a good credit history and score. There are qualified purchasers throughout the country and even for those buyers who may not be stellar there are still means by which they can purchase.

Bank Financing
Currently, there is an abundance of financing available from multiple banking sources at very competitive rates, ranging from 5% to 6.5% for qualified buyers. Lenders are routinely financing 100% of the loans with additional working capital available, and generally, only in isolated situations are banks requiring some owner financing. While there is more talk about owner financing out there in the market, the capital available for financing through the myriad of resources should mitigate this as a requirement for the foreseeable future.

Practice Availability and Value
In contrast to there being many qualified buyers available, there is currently a lack of quality practices on the market. Those considering a purchase in the near future should contact a transition specialist to discuss the parameters of the practice they are interested in so when a practice becomes available, a potential match can be made.  

Also, practice opportunities in non-urban or more rural areas may merit strong consideration as they generally have a strong and loyal patient base and lower overhead. In addition, these practices have less competition for the sale as fewer purchasers are strongly considering these opportunities. A comparable metropolitan practice would probably sell for more than the rural practice, creating a great purchase value. In all cases, an opportunity still must show good cash flow for it to make sense. In the cases where the practice does have good cash flow, values are remaining strong.

Non-Disclosure and Client Relationships
A more in-depth article about this topic is currently in the works but, as a short primer, we are still seeing potentially deceptive agreements covering confidentiality/non-disclosure from brokers in the industry. These agreements attempt to bind the purchaser to the particular broker and establish a relationship that isn’t necessary and potentially damaging to a transition. Please read these agreements carefully and be weary of clauses that attempt to reach beyond what is necessary to simply maintain confidentiality.

Capital Gains Tax Status
For those dentists contemplating a transition in the near future, serious consideration should be given to completing the practice sale before the end of 2012. With as much as 90% of the sale price allocated to goodwill, and because goodwill is treated as a long-term capital gain (currently taxed at 15%), it is important to note that this tax rate may only be available through the end of this year as it automatically reverts back to the previous 28% if Congress does not act to again extend the current tax rates. A practice selling for $500,000 can expect to pay $50,000 to $60,000 in additional taxes if the current capital gains tax extension expires.

Specialty Practice Sales
We are seeing an uptick in specialty practice sales and therefore values for similar reasons to what is sustaining the general practice market – supply and demand. Potential purchasers who have been in associateship jobs or associateships to buy that are not coming to fruition are looking to enter the market. At the same time, there has been a lack of supply, which is slowly loosening as practitioners again become comfortable with their position as it comes to transitioning out of practice and into retirement.

Planning
We have always felt it sage advice to always have an updated practice evaluation on hand. Your practice may be your most valuable asset and should experience growth in value of the next few years as the economy recovers. Having an updated valuation helps to not only plan for your eventual retirement but further to plan for the unexpected. For retirement sake, knowing true cash flow / net income available as well as the value of a practice at sale fills in a significant information gap for your future economics.

As to the unexpected, we speak firsthand as three members of our own team have had to unexpectedly retire from dentistry due to injury. While in situations of disability, we may have time, and a practice owner, to work with to keep an office open while working towards transition. However, in the case of a death, all could be lost. To counteract this, and to take advantage of the market as it returns, we suggest, at least, having your practice evaluated on an annual basis (baseline full appraisal with subsequent annual updates) if not commissioning a full death/disability plan. The unexpected comes without notice, by definition, and by preparing, a great burden can be removed from you and your family and friends in the event that something does happen.

Greg Auerbach, MBA

?Greg lives in Bradenton, Florida and is a partner in Professional Transitions. Professional Transitions is a full-service firm providing comprehensive transition services for dentists from graduation to retirement. Its central focus is to assist clients in realizing lifetime personal, professional and financial goals in win-win-win-win (seller-buyer-staff-patient) structured transitions.  Greg has been associated with Professional Transitions, Inc. and sister company ADS Florida, LLC since 2004.  He received his Bachelor's degree in Computer Engineering from the University of Central Florida and his MBA from Wake Forest University. Greg is also a financial analyst for the Pride Institute and Pride Transitions as well as served as the VP for Marketing for ADS nationally from  2006 - 2012. Greg has been a speaker throughout the West Coast of Florida and at several dental schools, nationally and has written for local, regional and national publications. Greg can be reached at greg@professionaltransitions.com or by calling 888.229.5764.