Frequently Asked Questions About Dental Practice Transitions
Practice Transitions Group has advised hundreds of dentists in business transactions. Educating yourself on our process is key to a successful transition. Here are some answers to frequently asked questions about the dental practice transition process.
1. What is my dental practice worth?
This is the most commonly asked question and one that, until a practice is taken to market, can only be answered with a fairly (and sometimes frustratingly broad) valuation range. While there are many “rules-of-thumb” (e.g., percentage of gross collections or multiple of net income), those historical measures can only provide an estimated range that relies on using some standard industry assumptions.
We approach your practice as a unique and valuable asset and work hard to match you with buyers who maximize your price and terms while being a good fit for you. We use multiple approaches in combination with our industry experience to arrive at a valuation and asking price that is fair and will stand up in the marketplace.
Use our Dental Practice Valuation Calculator today and find out what your dental practice is worth.
2. What will it cost me to use a broker?
We charge a success fee that is only paid upon the sale of the practice, similar to how you are charged when selling a home.
3. Should I even tell my staff or should I keep it a secret? What do I tell them? When do I tell them?
Typically we advise you not to tell your staff before selling the practice. In many cases the staff may start to sense something is going on, but telling them explicitly prior to selling is not advised as the loss of key staff can impact the value of your practice or make the practice more difficult to sell. Every situation and staff is different and we are happy to talk you through yours.
4. Why does Practice Transitions Group require a listing agreement?
Signing a listing agreement with a broker is beneficial because it commits the practice owner fully to the selling process. Many practice owners spend years talking to colleagues and consultants without making any progress. As long as they are just talking about it, they’re not selling. A listing agreement serves as a mental switch for the seller - a way for them to prepare and take action on their decision to sell, committing to the nights, weekends, reporting, and long conversations with buyers. An exclusive agreement launches the process and defines a timeline by which the broker commits to selling the practice. It also clarifies the broker’s fee and the cost of running the process and selling the practice.
Talking through the agreement surfaces conversations on the likely outcomes and invests the broker in the work. Granting exclusivity allows the broker to focus solely on the seller’s interests and achieve exceptional results.
5. How long will it take to sell my practice? What is the process like?
This depends on the type and revenues of the practice and the goals of the seller. We have sold practices in as little as one month, and it has taken as long as a year for some larger multi-location practices. The standard sale in a major market takes 3 to 6 months, perhaps slightly longer for specialty practices.
6. What is a walk-away deal?
A walk-away deal is when you sell your practice and within a month of closing, you don't have to think about your office ever again.
Walk-away deals are common when you're selling to another doctor. They are rare if you're selling to private equity (PE). This is because PE groups buy medical offices as investments for a return on their capital. As a result, they are willing to pay a premium for the office compared to what another doctor might offer. Additionally, they offer the selling doctor the chance to share in the potential upside of the capital event at a later stage.
In return for these benefits, PE groups normally expect the selling doctor to help ensure the continuity of the business and a smooth transition process. This usually involves a more formal and structured approach. The selling doctor will eventually leave, but not immediately. Typically, this happens after two to five years afterward, providing enough time to bring in a new provider and introduce them into the practice.
7. Do I have to stay on, or can I just sell and walk away?
This depends on the situation. We have clients who sell to groups and stay on for many years, and we have sellers who sell and walk away within weeks. Typically, choosing to walk away leaves the buyer with a riskier transaction, and the overall price paid for your practice may be lower than if you were willing to help transition to new ownership. If you can be flexible, we can almost always work something out with a buyer that works for both parties and lets you capture more value.
8. I've heard I can “roll equity” with corporate buyers and cash in on higher multiples. How does that work?
The following example illustrates the potential benefits of rollover equity for the current owners / sellers:
You own your practice and the enterprise value is determined to be $2,000,000, which includes $500,000 in outstanding debt. A corporate buyer has proposed a $2,000,000 million buyout, and you agree to roll an equity contribution of 20%, expressed as a percentage of sale proceeds payable to you at close.
At close, you receive $1,600,000 in cash but pay off the $500,000 in debt. This leaves net cash proceeds to you of $1,100,000. The remaining $400,000 (20%) is left in the business. With the operational support of their new corporate co-owners, you and them grow the business while the corporate co-owners are buying additional practices over the next 3 to 5 years.
After several years of growth, your co-owners find a buyer for the entire group. Valuation multiples on groups are typically higher than those on single practices and with the group’s help running it your practice has grown since you first sold. After breaking down the group’s sale price your practice’s portion of the valuation is $4,000,000. On that second sale, you still own 20% so your cut is $800,000. This means you turned the $400,000 you rolled as equity into $800,000. Your staying on to assist in running the practice likely resulted in a higher initial price as well.
9. I've been approached by and have an offer from a DSO. Why should I pay a broker?
The best way to maximize value and make sure you choose the right DSO partner is to run an auction process and receive as many offers as possible. The percent fee you pay to a broker will easily be covered by the increase in enterprise value you will get by running the process in this manner.
10. How much tax will I pay on the sale?
Please consult your tax advisors, and every situation is different, but typically over 90% of the proceeds are taxed as capital gains.
11. Why should I consider selling my dental practice?
Practice Transitions Group guides experienced dentists through the difficult decision to sell their practice. Developing a transition plan for your practice prepares you for a financially and emotionally rewarding sale of your practice when the time is right. Without a transition plan, the sale of a practice is much more difficult and much less profitable.
12. Do I really need a professional to help me sell my practice? If so, who?
Attempting to sell a dental practice without professional guidance drastically diminishes your odds of a successful transaction. While dentists may believe waiving professional guidance will save them money, neglecting to hire help will likely cost them more in the end.
Dental Practitioners should consider these risks before marketing their own practice:
- Excessive time dealing with tire-kicking buyers who are window shopping or simply want you to drop your price.
- Months of negotiation and posturing that ends when the potential buyer decides to purchase another practice.
- The inability to come to terms with a serious buyer on the price because neither party can speak objectively or with authority to pertinent issues and concerns.
- An adversarial negotiation approach by the purchaser’s advisor.
- Aggressive legal representation that declines all deals from a serious and ideal buyer.
- Your lack of expertise in fair market value prices results in selling your practice for less than it is worth.
- Once you grow weary of the process, you negotiate away large sums of money just to “get it over with”.
- The purchaser you finally come to terms with is unable to secure the financing.
- Paying your attorney to draft extensive documents they may not be familiar with, including key provisions which are detrimental to the process.
- The purchaser fails to manage the practice properly.
The ideal advisor will be someone who can be trusted by both sides to be competent, fair and objective. This eliminates attorneys, accountants, and brokers who represent only one side. Hiring someone with collective trust can result in both respective parties moving forward in confidence toward their mutual objectives.
The ideal advisor should also specialize in dental practice transitions. Your advisor should be competent in finances, legal matters, and able to fluently coach and interact with lawyers and accountants. Hiring an advisor with direct experience in structuring successful transactions similar to yours can ensure a deal is actually closed for a fair market price.
13. What should I tell my spouse to do if I should die before my practice is sold?
First, time is of the essence. The longer the practice sits, the less the estate will receive. After only a few months, the practice value will diminish by tens or even hundreds of thousands of dollars. All too often a grieving family has not acted soon enough and has unknowingly lost much of the practice value by not moving quickly to begin to market the practice.
Next, call in expert advisors with the ability to get the job done. Realize that next to divorce suits, estate sales are some of the most difficult engagements for a consultant. If you find someone willing to take it on, thank them and listen to their advice.
14. Will I have to finance the sale of my practice (“tote the note”)?
No, generally. Today’s lending market is advantageous since there are banks that specialize in dental practice transactions (that we routinely work with), and interest rates are at all-time lows (making it affordable for the purchaser). However, it is sometimes a requirement of the purchaser that the seller “retain continuing incentives post-closing” or if the seller wishes to obtain tax advantages through gain deferral.