In recent years, numerous accomplished practice owners have reached out to us, expressing a desire for an improved work-life balance and seeking assistance with the managerial aspects of their businesses to devote more time to clinical dentistry in turn, their overall happiness. Regrettably, many of these professionals have adjusted their lifestyles to their earnings and are reluctant to reduce their income, leading them to press on until they reach a state of burnout and dissatisfaction. I’m here to highlight that solutions exist NOW and I want to point out several overlooked factors that could render an affiliation with a DSO considerably more appealing due to your yearly income post affiliation being more than you probably suspect. Affiliating with a DSO isn’t solely about just the financial gains at only the time of sale. Let’s delve into some of the cash flow streams you need to consider when affiliating with a DSO.

 

General Overview – There are four cash flow streams in a DSO affiliation:

1. Cash at closing; typically, 60% to 80% of the enterprise value determined.
2. Associate Compensation; generally, 30% of your personal collections.
3. The potential upside of your equity that you rolled with the DSO; estimated to be 2x to 3x.
4. Profit distributions; depending on the type of equity you roll, you could receive 20% to 40% of the distributable EBITDA every quarter. This is a missing link that almost everyone overlooks.

 

Cash at closing

Most DSOs are looking to be the majority equity holder where they purchase 60% to 80% of your business and the seller retains to 20% to 40% of equity. Generally, a buyer/DSO would prefer to allow a seller to roll as much equity as possible as it mitigates risk and allows them to stay more cash-liquid to purchase more practice opportunities. If it is determined that your business value is $4M, you should expect to be paid 60% ($2.4M) to 80% (3.2M) in cash at closing. Why a seller would roll 40% equity as opposed to 20% equity varies but it is mostly narrowed down to two considerations:

1. How much longer do you plan on practicing? If you plan on practicing for more than 5 years then considering a larger equity roll may make sense for you as you could go through multiple recapitalization cycles with your DSO.
2. What is your appetite for risk? A DSO buyer will tell you everything you want to hear and how great their equity is but in reality, we tell all our clients to treat the equity rolled as “poker money” as you could get a huge return, or you could lose it all if the DSO goes belly up which is why choosing a reputable DSO with past performance is so important. Oftentimes, your best offer from a monetary perspective may not be when you consider the full picture.

 

Associate Compensation

If you are a major producer in the practice, you should expect to have to work back for three to five years post-affiliation. During that time period, you should expect to make 30% of your adjusted collections.

If you collected 1.25M as a provider, you would make 30% of this which is $375,000.00. Almost always, it makes more sense to take as little compensation as possible for associate compensation as that will factor into your EBITDA and ultimately your business evaluation. Let me explain.

If your provider collections amount to $1.25 million and you receive a 30% compensation rate, your earnings would be $375,000. However, many try to negotiate a higher percentage of compensation (E.g. 35%) as is commonly thought to benefit them and result in more overall cash in their pocket. If the same provider collections of $1.25M is run at 35%, your associate compensation then becomes $437,500. The difference between $437,500 and $375,000 is $62,500 in additional yearly compensation which sounds great at face value but what you are forgetting is that your EBITDA would also be reduced by $62,500.00 and if you are being paid a 6x of your EBITDA then you would be reducing your enterprise value by $375k (6x of $62,500) using this example.

3-year associate comp at 35% = $1,312,500

3-year associate comp at 30% = $1,125,000

Difference of $187,500 in associate compensation over 3 years.

As you will see when you run the math, taking 30% compensation instead of 35% will net you $187,500 over a three-year period as the increase in enterprise value is greater than the associate compensation at a higher percentage.

 

Understanding the Potential Upside of Your Equity

DSOs typically present two distinct equity options, each with its own set of advantages and disadvantages. We will explore the nuances and perform an analysis of the financial implications inherent to each model.

a) HoldCo Equity (AKA Parent Equity)

Initial Scenario:

Original Investment: Dr. Smith rolls over $500,000 of equity into the DSO’s HoldCo at the time of selling his dental practice.

HoldCo Portfolio:

Initially, the HoldCo, through its DSO, owns 10 dental practices, including Dr. Smith’s, with a combined annual EBITDA of $2 million.

Over five years, the DSO strategically acquires 10 additional practices, doubling the number to 20. These acquisitions increase the combined annual EBITDA to $6 million.

Valuation Increase:

Assuming a valuation multiple of 6x EBITDA at the time of Dr. Smith’s sale, the initial valuation of the HoldCo (and thus the DSO) was $12 million (6 x $2 million).

Revised Valuation: After the growth strategies are implemented, the new valuation at a similar multiple would be $36 million (6 x $6 million), reflecting the improved profitability and scale.

Impact on Dr. Smith’s Investment:

Initial Stake: Dr. Smith’s $500,000 represented a 4.17% equity stake in the HoldCo ($500,000 / $12 million).

Value of Stake After Growth: With the HoldCo now valued at $36 million, Dr. Smith’s 4.17% equity stake is now worth $1.5 million ($36 million * 4.17%).

Conclusion:

Dr. Smith’s initial $500,000 investment in the HoldCo equity has tripled to $1.5 million due to the DSO’s successful execution of strategic growth initiatives, including acquisitions, operational efficiencies, and the introduction of high-margin services. This example illustrates the potential for significant value appreciation through equity rollover in strategic transactions, particularly in growth-oriented industries like dental services.

b) Joint Venture Equity (AKA JV or Site Level Equity)

Initial Scenario:

Dr. Smith’s EBITDA at the time of a sale/affiliation is $400,000 and he was paid a 5.5x of his EBITDA, which gives us an enterprise valuation of $2.2M. Of that 2.2M purchase price, Dr. Smith elected to roll 25% equity in the JV. 25% of $2.2M is $550,000.00.

Valuation Increase:

Let’s then fast forward two years post-affiliation and now Dr. Smith’s EBITDA is $475,000.00; an increase of $75,000 and the DSO decides to go to market and they sell for 13x of their global EBITDA. Dr. Smith’s practice/group would now be valued at $6,175,000 (13 x $475,000). If Dr. Smith’s equity roll was 25% then he would see 25% of the $6,175,000 which is $1,543,750.

Impact on Dr. Smith’s Investment:

In this scenario, the $550,000 he originally invested got a 2.8x return to net him an additional $993,750.

*Disclaimer: There are various different structures from DSOs on how you will get paid on any upside of your equity. The example above is what we typically see but it all varies per DSO.

 

Profit Distributions

In my experience, the most neglected aspect by sellers unfamiliar with the process is the potential for profit distributions when considering an affiliation with a Dental Support Organization (DSO) that offers JV equity. For instance, if you maintain a 25% equity stake in the JV, you’re generally entitled to 25% of the practice’s profits after deducting the DSO’s management fees and any capital expenditures.

To put this into perspective, imagine the practice’s distributable EBITDA (post-management fees and capital expenditures) amounts to $400,000 for the year. Holding a 25% JV equity stake would entitle you to $100,000 (25% of $400k) of this total. This distribution is in addition to any salary received as an associate. This crucial detail is frequently overlooked by many sellers when calculating their potential annual income.

 

Conclusion

If this article hits “home” and you are looking for a solution, let’s discuss your options as there is so much more to an affiliation with a DSO than anyone knows at face value. This is just the tip of the iceberg.

In the realm of dentistry, practitioners often focus on perfecting smiles and ensuring oral health. However, when it comes to securing their financial future, dentists must also consider strategic investments. One avenue that deserves serious attention is real estate ownership. While leasing may seem like the convenient choice and does offer some benefits, delving into property ownership can offer dentists a myriad of perks that far outweigh the simplicity of leasing.

1. Equity Building: Leasing means paying rent without accumulating any ownership stake in the property. Conversely, owning real estate allows dentists to build equity over time. Mortgage payments contribute towards ownership, gradually increasing the dentist’s share in the property. As the mortgage decreases and property values appreciate, the dentist’s net worth grows substantially. As a rule of thumb, depending on the area, most property values double every 10 to 15 years.
2. Long-Term Financial Stability: Dentistry is a stable and lucrative profession, but financial stability shouldn’t solely rely on patient flow. By investing in real estate, dentists create a potential future secondary income stream that can withstand fluctuations in the economy. When it comes time to retire, you could retain the property while selling the practice to become a landlord and have residual income for years to come as part of your retirement plan. If being a landlord is not something you desire to do, you will have the ability to also sell the property with your practice. In fact, a practice that includes the sale of the property has shown to increase appeal and salability.
3. Control and Flexibility: Leasing puts dentists at the mercy of landlords who dictate terms, rent increases, property modifications, and lease assignment. On the other hand, owning real estate grants full control. Dentists can customize the space to suit their practice needs without seeking landlord approval. Additionally, they have the flexibility to expand or remodel the property according to their vision, fostering practice growth and efficiency. One major hurdle in the sale of a practice is getting the landlord to consent to a lease assignment or new lease terms.
4. Tax Advantages: Real estate ownership offers dentists a plethora of tax benefits. Mortgage interest, property taxes, depreciation, and maintenance expenses are all deductible, reducing the overall tax burden. Furthermore, owning commercial property opens doors to additional tax deductions, such as operating expenses and depreciation of improvements. These tax advantages can significantly enhance cash flow and boost long-term wealth accumulation.
5. Hedge Against Inflation: Inflation erodes the value of currency over time, diminishing purchasing power. However, real estate serves as a hedge against inflation. Property values and rental income tend to increase with inflation, preserving the dentist’s wealth and ensuring financial security in the face of economic uncertainty.
6. Legacy Building: Beyond personal financial gain, owning real estate allows dentists to leave a lasting legacy. Property ownership provides a tangible asset that can be passed down to future generations, securing their family’s financial future.
7. Aggressive Landlords: Commercial landlords often earn a reputation for being aggressive in their dealings with tenants. Whether it’s stringent lease terms, frequent rent increases, or assertive negotiation tactics, their behavior can significantly impact businesses. The aggressive nature of commercial landlords is shaped by a combination of market dynamics, investment pressures, economic factors, and legal considerations. While landlords have the right to maximize returns on their investments, excessive aggression can have negative consequences for tenants and the broader commercial real estate market. Achieving a balance between landlord profitability and tenant satisfaction is essential for fostering a healthy and sustainable commercial real estate environment. Landlords will always make a business decision which could be at your mercy.
8. Running the Numbers: To gain some perspective, consider this scenario – If your office lease costs $4,000 monthly, that’s $48,000 annually. Over a 30-year period, you’d end up spending $1,440,000 with nothing to show for it when you retire. Moreover, this calculation doesn’t even factor in the typical 3% annual increase in your lease, which compounds overtime. As a result, it’s highly probable that you’ll have spent over $2 million in total.

In conclusion, while leasing may offer short-term convenience, the long-term benefits of real estate ownership far outweigh the simplicity of renting. Dentists who venture into property ownership secure their financial future, build equity, gain control, enjoy tax advantages, hedge against inflation, and leave a lasting legacy. Therefore, it’s evident that for dentists looking to maximize their wealth and secure their future, owning real estate is not just a prudent choice but a strategic imperative.

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.

There is one common question that sellers want to know: “what is my dental practice worth?”. More than likely, the sale of your practice probably makes up a large part of your net worth. Due to this, planning your exit strategy and knowing what your business is worth becomes an important consideration when planning your retirement.

By reading this article, you are going to get an inside look at data from 122 sales of general dental practices that occurred in 2022. Before we dive into the details, it is important to note that these are averages and averages are here to provide you with just a general expectation. Understand that different states and geographical areas throughout the country vary in supply and demand which is a key consideration when valuing a business. While this article will provide a general expectation, I can not stress enough that you should consult with your local NAPB (National Association of Practice Brokers) representative to get a formal practice evaluation for your specific practice. The data cited was submitted by each of our broker members to where our organization covers ~90% of the United States.

Not all data is created equal! It is important to have a brief background on who the data was submitted by and how reputable the data is. The National Association of Practice Brokers (NAPB) is an exclusive organization of seventeen (17) dental-specific business brokers that provide dental practice transitions and valuation services to dental professionals around the country. Our members teach, train, network, and educate each other on tactics, practices, and processes surrounding dental practice transitions. This allows our members to provide the most current, up-to-date understanding and trends with each dental practice sale and appraisal while maintaining the highest standards of business relationships. Our group & organization (NAPB) sells more dental practices than any other broker, group, or organization in the country. Our organization has done over 10,000 practice transitions and has over 389 years of combined experience.

 

Average Sale Price:

National Avg. $735,065.47

Florida Avg. $957,337.50

Average Percentage of Gross Revenue:

National Avg. 75.6%

Florida Avg. 78.9%

Average Multiple of Earnings:

National Avg. : 1.98x

Florida Avg. 2.31x

*” Multiple of Earnings” is referencing ‘Adjusted Net Earnings’ which is what a dentist/owner would make from the business before interest, taxes, depreciation, and amortization.

 

Important Takeaways from the Data:

1. The most effective approach for yourself is to plan. Whether you are purchasing or selling a practice, this is a major life decision. You would be shocked by how many sellers do not know the value of their business or plan the sale of their practice in advance. We have found this either goes two ways:

a) You undervalued your business to where you could have sold sooner than expected.

b) You overvalued your practice by hearing ‘rule of thumbs’ and we must be the bearer of bad news that you need to continue to work as you are never going to get what you need to retire now.

It is of extreme importance to bring in a consultant & professional like a broker to not only value your business a few years before you think are you able to retire but also so they can give you feedback as to how you could make your practice more profitable and appealing to prospective buyers. Oftentimes there are a handful of tips that are cost effective and can go a long way if you plan appropriately.

2. Each broker from our organization submitted 7 to 10 of their last practice sales from 2022. While it is a fair sample size of data to evaluate, it should be noted that the data could still be skewed. As an example, the average sale price may be lower if you looked at a larger sample size and the percentage of revenue could be higher than what is shown above.
3. Practice values are increasing, and we do not expect this trend to change. We attribute this to a few factors:

a) DSOs are paying more for dental practices.

b) There is a larger doctor buyer pool because the existing dental schools are expanding, and more dental schools are opening.

In short, the demand for practices is increasing which in turn drives up the prices being paid and in turn practice evaluations.

What is considered when valuing a business?

You see the data points provided but may be wondering: “Why does one practice sell for 60% of revenue whereas another sells for 85% of revenue”? We wanted to outline a few of the key considerations that a professional analyzes when determining the value of a practice.

Four Primary Factors to Valuing a Business:

1. Cash Flow (Multiple of Earnings or EBITDA)
2. Technology & Equipment Value
3. Location – General & Specific
4. Overall Risk

Other Variables Taken into Consideration:

• General Location
• Specific Location
• Lease Arrangement/Terms
• Active Patient Count
• New Starts per Month & Year
• Insurance Participation
• Patient Demographics and Saturation
• Operating Efficiency
• Staff Continuity
• Ownership History
• Schedule & Bookings
• Marketing Strategy
• Accounts Receivable
• Fee Schedule
• Hygiene Revenue
• Procedure Mix
• Provider Mix

Are you ready to start planning your exit strategy and need a practice evaluation? Are you ready to start the process of selling your practice now? Contact us to learn more about our company and how we can help you. Transitions are personal and so are we. We let our reputation and results speak for itself.

Practice owners are well-known entrepreneurs. You are used to doing things yourself and doing it “your way.” When the time comes to sell your practice, you may naturally think that it can’t be that difficult to locate a buyer, could it? Why do I need to pay a broker to sell my practice?

What if I told you that you could probably find a buyer for your practice without the help of a broker? I always use the analogy with sellers that finding a buyer is like getting on first base; you are still a long way from home base or in this case, a closing. “Finding a buyer” is the key term here and getting that deal to a closing in an efficient and seamless manner while ensuring that you got the best price possible is the difficult part.

While the title of this article may be deceiving, the truth really is that a reputable and experienced broker in your market should be able to bring a competitive buyer pool to the table that will pay for their commission and still hopefully net you more money than doing it alone.

Think of it this way, to get to a closing you must get two doctors, two spouses, two attorneys, two CPAs, and one bank to all to say “yes”. This is much easier said than done.

Below are three reasons as to why you should consider using a professional when the time comes for you to sell your practice.

Getting Top Dollar

You may be able to find a handful of buyers on your own but know that you are limiting your buyer pool which can leave you wondering:

1. Did you get top dollar for your practice?

2. Did you find someone who is the best fit for your patients, staff, and practice as a whole?

3. Were you able to accomplish your ideal transition plan? E.g. Being able to work-back part time post sale to transition into retirement

The monetary aspect of a sale/transaction is an important one but generally it is not the only consideration. From the monetary aspect, we are oftentimes bringing 10+ buyers a quality practice opportunity which creates a hyper competitive environment and will oftentimes net you more money even after having to pay a commission. When making a major life changing decision like selling your practice, you do not want to lose sleep thinking to yourself, did I get a fair price? Was this person the best fit?

Qualified Candidates

Another pitfall that ‘for sale by owner’ doctors fall into are dealing with unqualified and/or unrealistic buyers. You may find a few buyers on your own, but can they get the funds to follow through and close? Are they “tire kickers” and trying to get a steal on your practice? We vet all our buyers before a seller ever speaks one word to a prospective buyer as we understand that time is money, and we don’t want to deal with people who are not serious about making a transaction or just difficult to work with. Currently most major metropolitan areas have the luxury to have a substantial buyer pool to not have to deal with these doctors who are obstinate. By using a broker, we take that workload of pre-qualifying buyers off your shoulders so you are not wasting your time.

The Value of a Middleman

Being able to communicate and work through conflict is something that sounds so simple but oftentimes is the sole cause of what ‘kills’ a deal. People are not good at communicating and working through conflict and to back my argument, the divorce rate in America is now ~40%. One job role of a broker that many overlook is that of being able to help mediate conflicts and provide an outsider’s opinion based on our reputation and experience. The opposing party is much more likely to tell the broker, a third party, what their true concerns are whereas we have seen it happen time and time again where a buyer may squash a deal for something that was so minor and there was an easy solution. The other party may never know what the ‘true’ reason was for backing out of the deal as they were scared to have a direct conversation. I would tell you that 7 out 10 concerns brought forth by a party are able to be remedied without having to even approach the opposing party as there was a simple solution or answer that the broker was able to provide.

Building off that, we are trying to bridge the gap between two very different generations of millennials and baby boomers. For example, we can have a practice that operates at 50% overhead and has net earnings of $500K+ but if it does not have newer chairs, CBCT, modern decor, etc then a buyer may need some convincing as generally the younger generation buyers want new and modern as they come from a technology age and want something familiar. It is our job to explain to them that if you are making $500k per year then overtime you can replace the equipment and decor. While the solution was simple, most buyers take everything at face value and will buy a practice that is new & modern but makes no money before buying something that makes sense from a business and numbers standpoint.

Why Doctor’s Choice?

Doctor’s Choice Practice Transitions is a team of experienced consultants who specialize in helping only dentists with their transition needs whether that be a doctor-to-doctor deal or affiliating with a DSO. We are privately owned and operated (just like you) and have a proven track record of success for the past 33 years. Doctor’s Choice has 11 agents in every major metropolitan area throughout Florida while other brokers only have one to three people who cover the entire state. Due to the lack of local support, these smaller brokerages will insist that you do the showing without them there! We believe that being involved in every step of the process and holding your hand through the entire process is what sets us apart from others. When interviewing brokers, it is essential to do your research and evaluate their experience, reputation, and services before deciding who to trust your legacy with. Our best suggestion when interviewing brokers would be to ask them to provide a list of practices that they have sold near you within the last few years. From there ask for a list of references so you can speak to previous clients firsthand about their experience with said broker. Most salespeople can talk the talk, but who is actually providing results for their clients?

The next chapter of your life starts HERE. Contact us today to learn more about Doctor’s Choice and find out how we can help you.

Ten Questions Buyers Should be Asking Sellers

 

“I have no idea what questions I should be asking, can you help?”. Below are 10 questions that we think every buyer should ask a seller at the first meeting when determining if a practice is a good fit for you. These questions/answers should provide you with valuable insight.

 

1) Why are you selling the practice and what are your plans post-closing?

 

2) What are you looking for in a buyer?

 

3) How would you describe the practice’s clinical philosophy?

 

4) Do you anticipate any team members leaving post-sale?

 

5) Can you briefly tell me about your team along with their strengths & weaknesses?

 

6) How do you currently get new patients?

 

7) What procedures do you refer out?

 

8) What does this practice need to grow?

 

9) What do you believe has contributed to the success of your practice?

 

10) Do you think I would be a good fit for your patients & team members?

Everyone is on edge with the COVID-19 virus that has suspended “essential” dentistry in Florida until May 8^th, 2020. We thought it would be beneficial to discuss some key items that most business owners do not have time to analyze and consider as time is limited when seeing patients and dealing with the other daily headaches of running a business.

Deferring Bank Loans/Payments

First and foremost, almost all major lending institutions are postponing loan payments for 60 to 90 days. The catch is that most are NOT doing this automatically and you have to call and request this. These lenders are just extending your term 60 to 90 days. Some lenders are penalizing your credit for doing such and you should ask them how much they think this would affect your credit if you elect to take this deferment.  

If you have debt on your practice still and your current interest rates are higher than 4% then it could make sense for you to refinance your loan. Or, do you need money to pay your bills during this time? There are ‘Dental’ lenders offering interest rates in the mid to high 3’s to refinance your existing debt OR to give you working capital to be able to pay your bills during this time.

Example, if you are five years into your ten-year term with a 5% interest rate, you can refinance the amount still owed over a new ten year term at a lower interest rate which would cut your payment in half (or less). This could be very valuable in a time like this where you may need more disposable income. We know lenders that are offering these terms and if interested, please reach out to us and we can connect you with these particular lenders.

Reviewing Business Expenses

This is a great time to review your practice from a business perspective. Go print out or ask your accountant for a 2019 Profit and Loss statement so that you can look over what you spent money on in 2019. Below are some guidelines as to what your expenses should look like. If your expenses are higher than what is cited below, you should be looking into as to why is this expense is higher than the norm. To figure this out, you take the expense and divide it by your revenue/income which will provide you a percentage. Ideally, your total business overhead should be running between 60% to 65%. If it is not, it would be to your benefit to figure out why it is not. Remember, you also need to ‘back out’ or ‘add-back’ your personal expenses that you may run through the business as these are not part of the business. Disclaimer, these are rule of thumbs.

Lab Bill: 7% to 8%

Supplies: 6% to 8%

Payroll: 20% to 25%

Rent / Mortgage: 5% to 7%

Office Expenses: 1% to 2%

Diving Deeper

When is the last time that you renegotiated your lease, overhead insurance, or insurance reimbursement? The typical answer? Never. Let’s discuss these three topics as these are things you can do NOW while you have down time.

Lease Agreements & Renewals

We cannot stress enough how important your lease is whether you are setting yourself up to sell in the near future or plan to drill for 20 more years. As a dental practice owner your two biggest expenses are payroll and your rent/mortgage payment to where you need to manage these expenses to make sure your business is profitable.

Your typical lease term for commercial is done in five-year increments with option(s) to renew for “X” years. When you sign a new lease or renew your lease it is vital that you, as a tenant, get something in return. This could be in the form of reduced rent or tenant improvements (also known as T.I.).

Let’s first talk about reducing your rent payments as this is something we see NOT happening often. In your lease, you more than likely have a yearly increase. This number usually ranges between 2% and 4% per year to where 3% is the commercial lease norm. If your rent increases by 3% per year and you never negotiate it over a ten-year span, then you could be paying well over fair market rent. What most people do not understand is that this 3% increase COMPOUNDSyearly. You are paying 3% on top of the 3% increase from last year and so on.

Example:

Base Rent in Year One: $3,500.00 per month

Base Rent in Year Two: $3,605.00 per month

Base Rent in Year Three: $3,713.15 per month

…

Base Rent in Year Ten: $4,566.71 per month

Difference of $1,066.71 per month from year one to year ten!

We highly recommend you use an attorney to help you with these negotiations and NOT a real estate broker or advisor as the broker will tell you that it will not cost you a penny then demand the landlord that they are going to pay them a commission otherwise they are going to find you (the dentist) a new location. This can go South very fast in various regards. We are a real estate broker and you heard it directly from us as to how to handle it…This is a tricky process and should be started  six to nine months prior to when you have to give notice to your landlord for renewal. Most commercial leases say that you have to give the landlord notice six months prior to the lease expiration date but we have seen some at even nine months. You want to start this negotiation process six to nine months before you have to give notice as this gives you leverage in the negotiation process. If you start the negotiations too late, the landlord knows you won’t have enough time to relocate and that you are bluffing. In closing, you are able to renegotiate your rent back down to fair market value.

If you are paying fair market rent already, something else you can do is ask the landlord to provide a tenant improvement allowance for you to fix up your space. Whether it be new ceiling tiles, flooring, paint, or cabinets – the landlord should keeping your space modern for you! When we walk into a practice that a doctor wants to sell and he has been in the same plaza and location for 20 years and they still have 1970s décor, it makes us cringe! The landlord should be providing you with money or free rent to enhance your space at least every ten years.

Overhead Insurance & Insurance Reimbursements

Have you been with the same insurance company for general office insurances and malpractice insurance for the last 20 years? As in anything, there are always other businesses that would love to have your business to where they will get more aggressive in order to do so. We have a few companies that provide such services and we would be happy to give you these contacts so that you can compare rates. I do not know about you but I would love to save an extra $2,000.00 every year.

Are you in network with PPO or HMO plans? Did you know that you can negotiate the reimbursement fees that you get paid? There are a lot of variables here as to how much, if any, you can get an insurance company to pay you but I promise you will be able to get a few to do such. If you can get five of the PPO plans that you are in network with to give you an additional $35.00 per crown, it would be worth it right? There are companies we know that do this for you.

Did you have a slow 2019 and are you thinking about getting on more insurance plans? The same people who help you negotiate your fees can also help you credential with more insurance plans while maximizing your reimbursement.

Stay safe and we will get through this together. If you need contacts for any of the services mentioned above, send us an email and we will get the information over to you. These expenses mentioned are really the tip of the iceberg as you should be doing the same with lab and supplies as well. None the less, we hope you found this information helpful. Time for you to get to work!

Sincerely,

Your Doctor’s Choice Team

Here we are already into February and one trend for the new year that we have seen is that interest rates have gone up considerably. It was not uncommon to see rates for the majority of last year (2017) in the high 3’s to low 4’s. Fast forward a few months into 2018 and rates are being seen in the mid 4’s to low 5’s now. This is not favorable for prospective buyers or sellers. Whether rates are to continue to increase or level out is unpredictable however bankers we work closely with expect rates to continue to increase.

For a buyer it is as cut and dry that you will be paying more interest over the course of your loan term which results in a lower take home. For a seller, you should understand that a dental practice is evaluated on multiple variables but the highest weight dependent upon how a practice cash flows. Higher interest rates are going to affect the cash flow negatively which means your practice will be worth less. With rates continuing to climb we do not know where it will level out but if you are a potential seller this is something I encourage you to take into consideration and keep an eye on.

Practice Grossing $685,000.00 and how interest rate effect cash flow and purchase price. 

5% Interest Rate = $494,570.00  Evaluation Price (72.2%)

7% Interest Rate = $450,730.00 Evaluation Price (65.8%)

9% Interest Rate = $413,055.00 Evaluation Price (60.3%)