5 ways to maximize ROI when selling your dental practice
All dentists plan to eventually sell their practices, so it’s reasonable for them to prepare for the event in order to increase the value of their practices. After meeting with many doctors through the years, I have observed five tactics that will help dentists maximize the return on their investments.
What’s in a name?
A prominent dental office down the street from me recently changed its name. The practice was known by the doctor’s name for many years due in part to the massive amount of community involvement they had for 30 years. His name was a well-known brand, and getting it to that point took a long time. However, the doctor realized that selling the practice as his name would not fare well for a buyer and would bring down the purchase price, so he changed the name to relate to the street and neighborhood, a bold but necessary move.
Studies indicate that up to 40% of patients leave a practice once the doctor with the branded name is gone. So, if the name of the practice is the doctor’s, it’s fair to say that the practice value will be less in these situations. When the name of a practice is more generic, the transition is simplified and value is added. A focus group study performed by Interbrand found that patients were 65% more likely to visit a doctor if the doctor was affiliated with a larger brand versus just his or her name.
Build a strong structure
Secondly, you need structure to your business operations. In a traditional business, there are multiple people serving in vital roles. Whether it’s CEO, CFO, CMO, or director of marketing, each role provides structure. In his Harvard Business Review article titled, “The importance of organizational design and structure,” Gill Corkindale stated, “Poor organizational design and structure results in a bewildering morass of contradictions: confusion within roles, a lack of coordination among functions, failure to share ideas, and slow decision making.”
In a typical dental office, the dentist wears many hats, including primary producer. Regardless of their level of business acumen, most dentists do not have time to operate efficiently in each category. Therefore, they need to create structure to each aspect of their businesses by assembling a team accountable for every department. They should start by having a consistent monitoring program. Buyers no longer want to know just production and collections. They want to see earnings before interest, taxes, depreciation and amortization (EBITDA), gross margins, assets, the lease agreement, and patient base.
As the owner, you will remain the CEO, but you need to have oversight and accountability in each aspect of your practice. One person should manage the finances, one the marketing, one the patient experience, etc. You need structure to data and the ability to access it. There’s preparation to selling a practice and the more prepared you are the more likely you will maximize your outcome.
Systems keep things organized
It’s important to have business systems. Buyers do not want to purchase a disorganized practice. They want a business that runs smoothly with systems in place to ensure that their investment is worthwhile. According to a study by Deloitte, companies that employ state-of-the-art business and human resource systems see an average cost savings of 22% per employee. For example, systems for new-patient acquisition and employee on-boarding ensure that once a new doctor is in place, the new-patient flow will continue even after the selling doctor leaves.
Having a system for re-care and reactivation will make an acquisition seamless and more attractive. Systems for dealing with financial arrangements and insurance ensure that the money will flow and the bills will be paid. Systems for dealing with staff via policies and procedures are vital so the team can support the practice in their roles. Systems for communication will ensure that when change occurs, the team will be ready to communicate effectively and productively. Be sure that the new buyer knows that about these systems and that they can be shared easily.
Handling the boss’s paycheck
Practice owners often pay themselves based on what’s in the bank at the end of the month. This is a dangerous policy and has put the profession in an interesting conundrum. The perception outside of the profession is that we have huge profit margins because for years practice owners have touted that they have only a 50% to 60% overhead and the rest is profit. This is simply not true.
Pay yourself as an associate at the same rate you would pay an associate in your practice, which is typically 30% +/- 5% of collectible production. This keeps the numbers clear and concise and your value to the practice can be quickly determined. This also improves your ability to figure the profitability of your practice, which will be important when you enter a selling situation. Being disciplined in this area will give you perspective, increase your productivity, improve your standard of care, and make your practice easier to sell.
Keep a sharp eye on expenses and profits
As a business owner you have many advantages that employees do not. This can come in the form of tax deductions and business expenses. However, owners often co-mingle funds and blur the lines of expenses and deductions. Therefore, it is vital for you to properly categorize and manage business expenses and profits.. Based on analysis of almost 100 practices, I found that the average profit margin for dental practices is between 3% and 6% after management fees. Management fees are paid to the practice owner or management firm for services related to running the practice.
For example, if you are managing the practice, the practice should pay you a management fee, (e.g., 5% of net sales). Also, business expenses should be properly accounted for by itemizing them in appropriate categories. Finally, any additional profits should be designated as shareholder dividends. This will simplify the valuation process of the practice because profits can be precisely determined. This will also allow you to more accurately determine what you will be paid after the sale of the practice is finalized.
Selling your practice is typically not turnkey and will require you to remain part of the practice for a couple of years, so plan ahead. Follow these five tactics to maximize your ability to sell your practice. While selling might not be simple, if you’re prepared you will improve your odds of getting a better ROI. You’ve spent many years building your practice, and these five simple tactics will help you get what you deserve.
