Things to Consider When Planning to Sell Your Dental Practice

You have had a glorious career in your dental practice, changing thousands of lives for the better — and now it is time to move on to the next phase of your life and start thinking about selling your practice. Here are some things to consider before starting the process.

The first thing I ask people who come to our brokerage is, “Can you financially afford to do this?” It is important to sit down with your financial advisor to see if you have saved enough to replace your practice income. Remember also that expenses that you are used to having paid through the practice (for example, your automobile expenses) will now need to be paid by you personally after you sell. If the funds are not quite there, you can either work a few more years and then sell, or if your practice is large enough, you might arrange to work part-time as an associate. But in order to be able to work back for a buyer of your practice, and for there to be enough revenues to pay overhead, the buyer’s income, the associate income, and the buyer’s practice note, it usually takes an office generating $1.3 million or more.

For example, if your practice collected $1.3 million and your overhead was 65%, that would leave a profit of $455,000. For the buyer, assuming he or she could keep the revenues and net profit at the same levels, the buyer would have to make enough to pay the loan payment, plus other expenses. In this scenario, if the practice sold for $1 million and the buyer had a loan for that amount at 5% interest for 10 years, the payment would be $10,606 per month or $127,272 per year, so round that to $127,000. Then, if you (the seller) working back as the associate produces $300,000 per year and you’re paid 30% of your production, that would be a cost of $90,000, plus payroll taxes, etc. — so say $100,000. That leaves the buyer $455,000-$127,000-$100,000 or $228,000.

The advantage of working back is that it allows you to help to transition the patients over time to the buyer, and it allows you to keep funds in your retirement plan longer. For example, if you worked for another three years and earned $100,000 per year as an associate dentist for the buyer of your practice, this would allow you to keep an additional $300,000 in your retirement plan and will give you more funds for retirement, with a shorter period of time in which you need to use them. In other words, if you are 65 and your life expectancy is 85, if you work three more years, your retirement nest egg would only have to last 17 years instead of 20 years.

Next, make sure your office shows nicely. Remember the last time you sold your home? The agent told you to either clean it up, so it looks nice, or had you stage it for showing. If your office looks a bit dated, the paint is peeling and the carpet is worn, you might consider sprucing it up. In addition, make sure the equipment looks good and is in good working order.  I would not recommend making expensive equipment purchases (e.g., a CBCT machine) right before selling, as the value of your practice will not increase in most cases by adding equipment. On the other hand, if you are two years or more from selling and you do not have a digital X-ray machine in your practice, you should consider adding that technology. Virtually all dentists who are looking to buy do not know how to practice without this technology, and they will reduce the price they offer (or might not even make an offer) to compensate for having to add digital radiography capability.

We generally do not suggest you tell your dental team that you are selling. In these very uncertain times, team members might start looking for a new job. And the loss of staff (especially if multiple team members leave) will impact your production and, ultimately, the value of your practice.

As a seller, the most important thing you can do is to make sure that your practice revenues are stable or going up, and that your profitability is well into the mid-to-high 30% range or greater. Your profitability is calculated by taking your collections, less all of your operating expenses, such as team salaries and benefits, lab costs, supplies, rent, marketing and advertising, and all other expenses, not including your salary and benefits, which are really part of the practice profit.

Dental offices are generally valued at either a percentage of gross revenues (depending on the area of the country, usually 65% to 90% of the prior one to two years’ revenues) or a multiple of “true net profit.” True net profit is your bottom-line financial statement profit, plus “add backs,” which include the owner/dentist’s salary, depreciation, amortization, interest expense, the employer portion of retirement plan contributions, automobile expenses, and any other expenses that are not reoccurring. The higher your revenues and the higher the true net profit, the higher the price you’ll get when you finally sell.

So, what I tell people is that two to three years before you sell, if you have been paying expenses that are shown on the profit-and-loss statement, but are really more personal in nature (one client told me he had a “businal” account — a combination of business and personal), you might consider that you have won the war for 30 to 40 years in writing all of these things off, so it might be wise to lose a few battles so your financial statements show the practice’s true (and probably higher) profit margin. When they determine how much they are going to lend a buyer, banks generally do not consider these “businal” expenses as add-backs when doing their underwriting calculations.

And, finally, if you are two to three years out and have put your practice on “cruise control” — meaning that you do not push hard to increase your production, don’t do much marketing, and do not ask patients for referrals — you might consider hitting the gas pedal for the last few years, as this could help raise the price by tens or hundreds of thousands of dollars when you ultimately sell the practice.