Key Considerations Before Selling Your Dental Practice

Preparing for Success: Key Considerations Before Selling Your Dental Practice

Selling a dental practice is more than a transaction; it’s a significant transition that impacts your legacy, finances, and long-term goals. Whether you’re moving toward retirement or looking for a new challenge, a successful sale requires strategic preparation. Here’s a guide to the essential steps and considerations dentists should address before putting their practice on the market.

1. Establish a Succession Plan: Choosing the Right Buyer

Who you sell to will shape your practice’s future and influence the sale process. Here are common buyer options:

• An associate or partner in your practice: Selling to a current associate can ensure continuity and maintain patient relationships. But balancing shared goals and addressing valuation challenges can be complex.
• Another dentist or independent practice: Finding a local buyer through brokers or personal connections can bring fresh energy while preserving the independent spirit of your practice. But there may be changes in practice style or operations that impact patient retention.
• Dental Support Organizations (DSOs): DSOs can offer attractive financial terms and streamlined operations, but they often impact practice autonomy and culture. Weigh the pros and cons to ensure this aligns with your vision for the future of your practice.

2. Know Your Timeline and Plan Accordingly

Defining your exit timeline is crucial for a successful transition. If you aim to sell within a few years, start preparing now. Keep in mind that processes like credentialing for insurance-based practices can be time-consuming, so early planning is essential. Knowing your timeline will allow you to optimize your practice’s financials, ensure legal and regulatory compliance, and communicate effectively with patients and staff.

3. Organize Your Financials for Transparency and Control

A well-organized financial statement helps pinpoint problems, improves operational efficiency, and gives potential buyers a transparent view of your practice’s performance. Regularly updating your financial statements—ideally on a monthly basis—allows you to make real-time decisions that improve profitability and financial health. Remember, you can’t manage what you don’t measure, and buyers appreciate transparency.

4. Enhance Profitability and Reduce Expenses

To make your practice more appealing, focus on enhancing profitability and managing expenses. Benchmark key financial metrics like:

• Overhead Rate and Collection Percentage: Keeping overhead low and maximizing collections is crucial for healthy cash flow.
• Production Ratios: A balanced ratio between dental and hygiene production, as well as reasonable wage ratios, reflects operational efficiency.
• Accounts Receivable Aging: Regularly reviewing and collecting outstanding accounts signals a well-managed practice.

Small improvements can have a big impact on profitability, which in turn can boost your practice’s valuation and attract serious buyers.

5. Ensure Compliance and Address Legal Issues Proactively

Legal compliance and a clear record are fundamental. Make sure all licenses and permits are up-to-date, resolve any outstanding legal issues or disputes, and know the details on any liens on practice assets or real estate you intend to sell. Buyers will do their due diligence, and any outstanding issues could delay or complicate the transaction. Address these proactively to streamline the process.

6. Understand Valuation Metrics and the Key Drivers of Your Practice’s Worth

Knowing how your practice will be valued allows you to take actionable steps to enhance it. Key valuation factors include:

• Three-year weighted average and collections: Consistency in collections and revenue over the past three years creates a stable foundation for valuation.
• Multiplier of adjusted net professional income (ANPI): ANPI is a critical metric adjusted for “addbacks” like owner compensation, discretionary expenses, and depreciation. Addbacks show true profitability by adding back expenses that might not transfer to the new owner.
• Cash flow: Cash flow is paramount in valuation; a practice with reliable cash flow is more attractive to buyers. Strong cash flow reflects the practice’s ability to support both operating expenses and profitability.

7. Consider Equipment and Office Aesthetics Upgrades

If you’re planning to sell, updating your equipment and refreshing the office aesthetics can enhance your practice’s market appeal. Prospective buyers often value modern, well-maintained facilities, as they show practice function and aesthetic appeal to patients. Additionally, any improvements you make to the real estate (if you own it) can increase its resale value, which benefits you directly.

8. Build a Team of Industry-Specific Advisors

Selling a dental practice is a specialized process you will benefit from having a knowledgeable advisory team. A dental industry-experienced attorney, broker, and accountant can help streamline negotiations, structure the sale to your advantage, and ensure compliance. Industry professionals will have insights into current market conditions, valuation trends, and tax implications unique to the dental industry.

9. Define Your Desired Post-Sale Involvement

How involved do you want to be in the practice post-sale? Options range from continuing as an employee or consultant to making a clean break. Many DSOs and private equity buyers may require a one- to five-year commitment, often involving a withheld portion of the buy-out to ensure a smooth transition. Clarifying your preferences upfront will help you negotiate terms that align with your goals.

Conclusion

Selling your dental practice is a major milestone that requires careful planning and strategic preparation. By understanding the nuances of your practice’s financials, proactively addressing compliance and legal issues, and assembling a skilled team of advisors, you set the stage for a smooth and profitable transition. Whether you envision passing the reins to an associate or partnering with a DSO, a thoughtful approach will help you maximize the value of your practice while protecting your legacy.

Taking these steps can make a world of difference, ensuring that you, your staff, and your patients all benefit from a well-planned sale. At Franklin & Frankel, we’ve successfully navigated hundreds of dental practice sales – contact us today for a free consultation. No matter where you are in the process, we can help.