Selling your dental practice is an enormous life-changing decision from a professional, personal, and financial perspective. Surprisingly, it is not uncommon for prospective sellers to not plan the process and their exit strategy. You would be astonished at how many dentists call us to sell their business and are ready immediately to bring their practice to market. Failing to plan is planning to fail. Below is a list of common pitfalls that you need to be aware of so you can make the sale of your business as seamless, profitable, and stress-free as possible.

 

Stay on the Throttle!

The most common occurrence we see when selling a practice is that doctors start working less, take more vacations, and refer out procedures that maybe you once did but no longer want to do. Practice valuations are typically based on a weighted average of your last three (3) years of collections with the highest weight on the most recent year. Buyers as well as banks do not want to see a sudden drop in working days or collections as it makes them wonder what is really causing a decline and if the practice is healthy. If you are depending upon every penny from the sale of your practice for retirement, this is something that is easy to avoid and to be conscious of. If you don’t mind taking less for your practice as you value your time off more than getting top dollar for your practice that is fine but try not to let collections drop by more than ten percent (10%) as this is when banks start to waver.

 

Stop Taking Cash

This is a grey area of discussion, but a fair number of business owners take cash and do not report it in their financial statements. If you want to get paid on those cash collections, start reporting all income. I have never met a buyer (or lender) who is going to just take the seller’s word for it as brokers, buyers, and lenders all base their evaluation on what is shown on your corporate tax return or Schedule C.

 

Control Your Overhead

Whether you are considering a potential sale or not, when is the last time you did a health check on your practice expenses to ensure they are in line with market standards? You were not taught in dental school how to run a business nor do many dentists take continuing education to further their knowledge on how to be more profitable. Below you will find a list of the market norms for certain expenses in a dental practice relative to your collections. How do you measure to those norms? Note that these metrics are a rule of thumb and your overhead will vary based on your collections due to fixed expenses not increasing with collections.

• Dental Supplies: 6% to 8%
• Lab: 7% to 9%
• Rent or Mortgage: 5% to 7%
• Marketing/Advertising: 1% to 2%
• Office Expenses: 0.5% to 1.5%
• Staffing & Payroll: 20% to 25%

Some of these expenses are easier to modigy than others. Let’s use lab or supply costs for example, you can change suppliers, labs, or the products themselves tomorrow to potentially get a better fee schedule and increase profitability. While your rent or payroll cost is much more of a process while the return could also be much more significant. When making changes, you must weigh a cost vs benefit analysis for anything you are doing. Payroll & wages can be one of the most challenging overhead expenses to adjust. We will discuss more about how to cut costs pertaining to your rent cost below.

 

Renegotiate Your Lease

Landlords drool from the mouth when they hear the word “Dentist”. Why? It is proven that doctors don’t like to relocate due to the extensive built-out cost, therefore, you oftentimes see doctors in the same location for 30+ years. On top of that, dentists have one of the lowest default rates (less than 1%) of any business in America.

Are you negotiating your rental rate and terms every time you are due for a renewal? Your rent is arguably the most negotiable expense in your business. The standard base rent increase is 3% per year and it compounds. After 10 years, it is easy to say that you could be paying $2,000+ a month more. Does your space need new flooring, paint, ceiling tiles, or baseboards? These are all things that could be negotiated into your next lease renewal as a “tenant improvement” cost for the landlord to cover.

Another thing to keep in mind if you are planning to sell is that a buyer’s lender will require them to have at least a 10-year lease remaining through the existing term or through options to renew. A bank will not lend any buyer the money if that is not the case as the lease term must match or exceed the length of the banknote which is usually ten years. Essentially, the bank wants to make sure the buyer pays back the note and ensuring that the dentist/buyer has a place to do dentistry is a key component of being able to do that.

Negotiating a lease is very delicate and it is highly recommended that you enlist the help of an experienced real estate attorney.

 

Increasing Your Fees and Insurance Reimbursements

Despite the obvious positive implications for practice profitability and value, many dentists are reluctant to raise fees in the years leading up to the sale of their dental practice. Most prospective sellers are winding down their careers, and thus believe themselves to be financially sound, and are reluctant to “burden” their patients with fee increases. However, a dentist who has not raised fees for 36 months passes on a need for a 9% fee increase if the buyer is to make up that ground lost due to inflation alone.

“Who cares what the former owner did or didn’t do with the fee levels of the practice? The buyer can fix that problem!” Unfortunately, it’s not that simple. Even in instances where buyers increase fees as a necessary act to cover the ground lost by the seller to inflation, the mere act of increasing fees is often viewed by the patients and staff of the practice as a negative rather than the appropriate adjustment to market. As a result, buyers may see this as too much of an uphill battle to consider your practice as a fit for them.

Some sellers think that patients will leave if fees are increased. In fact, less than 10% of patients will even notice a fee increase from $650 to $710. The same fee increase made by the seller will result in less than 1% of the patients making an issue of the increase, while the same very reasonable and appropriate change made by the buyer typically creates a real sense of outrage and confusion for a majority of both the staff and patients of the practice.

Did you know that you can also renegotiate your insurance reimbursements/fee schedules as well? There are companies that can help you with this and most dentists are not aware that your insurance fee schedules are typically able to be negotiated every two years. There have been instances where doctors have increased their collections by over $100,000.00 per year by utilizing someone to help you with these negotiations. Remember, you are doing the same amount of dentistry and have the same costs therefore this additional $100,000.00 becomes all profit. This becomes an immediate benefit for the business owner and it will increase your practice value by having higher collections and net earnings.

 

Staying Modern with New Technology

Bridging the gap between the boomer generation (typical seller) and the millennial generation (typical buyer) when it comes to office décor and equipment is a constant hurdle when selling a dental practice. The younger generations crave new technology whether it be a new iPhone or a 3D printer whereas older generations could typically care less. An extremely dated practice making $400k per year can be harder to sell than a modern practice making only $150k per year.

The takeaway is that a buyer needs to understand that if you are making $400k per year as in this example above then you can afford to buy new equipment and renovate the office over time. As a seller, you need to take into consideration what buyers want and how to make your practice more appealing and valuable.

I am not telling you to necessarily go buy all new equipment for your office before putting your office on the market because you probably will not get a full return but we can “put lipstick on the pig” and find a balance. Finding the balance may be new paint, baseboards, reupholstering dental chairs, artwork, and so on.

If you are 3+ years from retirement then maybe you do want to consider buying some new equipment as think about it like this – You will get the benefit & joy from it, it is a tax write-off, and it will increase your practice value in some regard.

 

The Potential Drawback with a C-Corp

If you are registered as a C-Corp, you will want to have a plan of action with your CPA pertaining to the sale of your practice more so than other tax elections. One notable aspect of C-Corps is that they are subject to double taxation. The corporation pays taxes on its profits, and then shareholders also pay taxes on any dividends they receive from the corporation. This same principle could apply to when you sell the business if certain items are not handled ahead of time. We are not certified public accountants, nor do we give tax advice but we recommend you to consult with one with any exit strategy to understand your tax liability but particularly if you are a C-Corp.

 

Get Your Spouse Out of the Practice

Having spouses working in the practice is common however when it comes time to sell, these family members can pose an issue from a transition standpoint. Almost always, your spouse will want to retire at the same time as you. Having a selling doctor exit the practice along with let’s say an office manager makes a transition from the buy-side more difficult which in turn may not give them the comfort they need to purchase the practice, or it gives them a reason to offer less money.

Our suggestion is to get these family members out of the practice six to twelve months before you decide to retire as this gives a new team member time to be trained and create relationships with your patients. The other option is for the spouse to stay on post-sale for six to twelve months however we find that most people are not fond of that option therefore it is usually better to remedy the situation in advance of a sale.

 

Closing Thought

You are in the office almost every day and you probably don’t even walk through the front door. My best advice is to have three friends or family members do a walkthrough of your office and point out anything that looks dated and needs updating. You can then decide if it would be a good investment and worthwhile to get these items replaced. Remember, your landlord may pay for it! Don’t get more than three opinions or you will be updating your whole office.