4 tips to maximize your dental practice appraisal and finance the sale
Getting closer to making the big move of selling your dental practice? There are many things you need to know, but with the good news of more dentists entering the market soon, it's important to make sure you get the most out of your practice.
The supply of dentists in the US is predicted to grow through 2033, according to the Health Policy Institute of the American Dental Association. This is good news for Americans, who as of 2014 were facing a shortage of around 7,300 dentists. With new classes of dentists embarking on their careers over the next several years, this means more opportunities for established dental professionals to consider a retirement plan that includes selling their private practice.
If you’re planning to sell your practice in the coming years, it’s important to understand the factors that banks look at when evaluating a transaction. Here’s are four things you should keep in mind as you prepare for a practice valuation.
1. Maintain strong practice activity throughout your career—As retirement approaches, it can be tempting to cut back workdays to accommodate more vacations and leisure time. However, when banks review the reasonableness of a practice appraisal or sales price, the last one to three years of operations and productivity are the most scrutinized, not the lifetime revenues or profitability of the business. As such, maintaining full operations until your practice sells is incredibly important. So think twice before canceling insurance plans, increasing outside referrals, reducing the overall number of active patients, or cutting office hours, marketing, or procedures.
2. Understand the key factors that impact value—Keeping facilities and equipment updated is essential, but the most valuable asset to a practice is a vibrant and growing patient base. The significance of your active patient records (patients treated in the practice during the last 18 months) cannot be overstated.
The primary purpose of purchasing an existing practice is to acquire the active patient base. It is the most important asset purchased because it carries the most value (intangible asset value averages approximately 75% of the total dental practice value). The other key driver for practice value that you can control is profit margins. Practices with a high overhead will command less market value, while more profitable practices provide stronger cash flow and will sell for higher values. An increased annual net income supports a higher practice sales price, yet can still provide the buyer with a reasonable income to cover personal living expenses after paying the existing practice debt plus the new acquisition loan debt.
In addition, the business' marketability, demographics, new patient growth per month, and the prevalence of PPO, Medicare, and Medicaid insurance among the patients are all important variables that can either help or hurt a practice’s ultimate value.
3. Develop a transition plan with the buyer—Beyond evaluating the factors that will determine your practice’s value, it’s important to create a realistic transition plan for what will occur after the sale. An effective "future state" plan that accounts for all providers and their production levels as well as financial projections is critical to validating the practice's capability to produce adequate revenues, maintain sufficient cash flow, and cover debts. This plan also impacts whether the buyer will qualify and be approved for 100% financing of the practice sales price.
Determine whether you and other associate or partner dentists want to stay on in the practice and for how long, and what production levels will look like versus compensation. All these decisions will impact cash flow, especially if the practice did not previously carry associates or a partner.
ALSO BY DANIEL CROFT: 3 things dentists need to know when applying for practice finance loans
4. Work with a specialist—Given all the years of work you’ve invested in building and maintaining your dental practice, it is incredibly important to ensure you get fair market value (FMV) when you sell and that you don’t leave money on the table.
Working with a qualified dental transition consultant is one way to make sure you aren’t shortchanged in the transaction. General business appraisers and personal advisors to dentists typically lack the dental training and practice sales experience to accurately value your business. Therefore, it is important to seek out a specialist who will know which factors matter within the industry and your local market.
When selecting a specialist to prepare your valuation, here are a few factors to consider:
• Credentials and valuation/appraisal certifications
• Intimate knowledge of the practice sales marketplace
• Experience and local knowledge of the area where the practice is located
• Reputation and references
As you approach retirement or otherwise contemplate selling your practice, consider how to best position the business for the optimum value in your local market. By working with an expert lender in practice transitions, you can better protect your interests, and your wallet, during the process.
