How to Sell a
Dental Practice
How to Sell a Dental Practice: Top Questions Sellers Ask
Figuring out how to sell your dental practice is a process filled with important decisions and questions to be answered. Just as you implemented a strategy to build your dentistry practice, you’ll need a plan in place for a successful exit.
Learning how to sell a dentistry practice takes time, and can often take as long as the sale itself. It’s a long-term process that requires methodical planning, due diligence, and time – often taking several months to effectively transition a practice successfully. After all, you want to get the highest valuation possible for your practice.
As a seller, this means positioning your dental practice in the highest regard for potential buyers and having the systems in place to facilitate a seamless transition.
How Long Does It Take to Sell a Dental Practice?
Instead of selling your practice because you have to, you should sell your practice on your terms to maximize your return on investment. Ideally, this would be when your business is still in the growth stage and you have time to wait for the right buyer/offer.
The goal shouldn’t be to sell a dental practice quickly. If you are looking to sell quickly, you could potentially accept an offer that is lower than your practice is worth. The average time to sell a dental practice varies depending on the size, location, equipment, and other factors.
How Much Can You Sell a Dental Practice For?
The marketplace will ultimately determine the selling price; you need to know the market value or worth of your practice. A dental practice is unique and each practice has distinguishing characteristics such as location, size, and type of equipment, philosophy of practice, etc.
Practices are valued within a wide range of 60% to 85% (sometimes more) of annual collections. Look to an experienced dental practice transitions consultant to establish a comprehensive appraisal to get the most value out of your practice.
When is the Best Time to Sell a Dental Practice?
To ensure that you’re successful in these two areas, you have to decide on the right time to sell. Waiting until you are forced to put your dental practice on the market means that you will be rushed into a decision – having a significant negative impact on the price and potential buyer pool.
There are a few indicators to consider: change in revenue, tax implications, reduce stress load, family considerations, whether or not you want to sell through M&A, and many more. Perhaps most importantly, your physical ability and motivation to continue practicing. All of these are relevant and should be taken into consideration. The goal is to ultimately protect your valuable assets. Remember, it is never too early to build a plan.
You should also seek the advice of your tax advisor regarding possible tax implications from the practice sale; likewise, you should speak to a dental practice sales broker regarding the current market price of your practice as well as various tax-saving deal structures available to you.
Transition Tip:
It’s not in your best interest to put your practice on the market just to “test the waters.” Not only does selling a practice require a great deal of your time and your business consultants’ time, but it could unnecessarily disrupt your staff and their sense of security. For this reason, you should be confident in your decision before initiating the sales process.
Should You Sell Your Building With Your Practice?
Depending on the value of your building and your financial position, you have two primary options to consider when dealing with correlating property: sell the property along with the practice or lease the building to the new practice owner.
Sell the Property With the Practice
Selling the property with the practice has its advantages. Once the sale is final, you’re out of the property and can focus on the future you have planned. However, there are some things to consider when you sell them together. One drawback is the fact that selling both can greatly limit the number of potential buyers you can field.
Many buyers, especially those recently out of dental school may not possess the means to purchase both at the same time. Another factor to consider is the tax ramifications of the sale of both. You may face a lot of tax consequences and liabilities associated with the sale. One way to avoid them is by leasing the building and sell later.
Lease Building to the New Buyers
If you have the financial means to be patient with the sale of your property, leasing the building to new buyers can be very advantageous. In addition to initial tax breaks, leasing will provide you a steady flow of income and allow you to take advantage of property appreciation over time.
There are a few negative aspects of leasing. You are going to be responsible for the maintenance, repair, and operating expenses of the property. This can consume a decent bit of time and energy that is precious for the next phase of your career. As an alternative, many sellers use a property management company, but this cuts into the profits you are making from the rent.
Sell to a Third-Party Investor
If you have a super practice and good credit rating, you should consider selling the property to a third-party investor. To pursue this option, you will have to negotiate a long-term triple net lease with the new owner of the practice. This security, along with your previous success and good credit rating, has great appeal to potential investors.
The guaranteed stream of income from the lease will allow you to sell your property for top dollar to an investor. This sale, combined with the sale of your practice, will almost always yield the highest dollar amount for the sale both together. However, know that you will have to put in significantly more effort.
What to Do Before You Sell Your Dental Practice
Learning how to sell a dental practice can help you better understand the overall process and hopefully alleviate the overwhelming aspects of transitioning your practice. The guidance of a dental practice advisor can certainly absorb much of the workload, all while helping market your practice to a much wider network of potential buyers. In any case, there are common steps involved when you sell your practice, along with some helpful tips to get you started.
Prioritize Your Goals for the Sale
Before initiating the marketing and selling process of your dental practice, it’s important to first identify what’s most important to you and what exactly you’re trying to achieve. If you are considering putting your practice up for sale, ask yourself the following questions:
- Why do I want to sell my practice?
- What will I do after I sell?
- What will I do with the money from the sale?
- How much money can I expect to net after attorney, CPA, brokerage commissions, and taxes?
- How long do I plan (or need) to continue working in the dental practice following the sale?
- In many dental practice transitions, maximizing financial return is the primary objective. For others, the timeliness of completing a sale by a certain date is more important. Some dentists prioritize finding the right buyer who will retain their staff after the transition. Considerations like these will help determine the trajectory of selling a practice, as well as knowing what you’re willing or not willing to negotiate.
Establish Your Transition Team
It’s not uncommon for dentists to do their homework to handle the sale on their own to save money. However, there’s a lot more to selling a dental practice than what meets the eye, and there are experts in the industry for a reason. Dentists find that these advisors are well worth every penny in the long run.
Among the advisors who can help facilitate your transition include dental practice advisors, attorneys, and accountants or CPAs. Consider recruiting the help of these experts as part of your team and keep them informed on all of your decisions and considerations when transitioning your practice.
Consider Your Practice from a Buyer’s Perspective
You have worked hard to build your practice and naturally, you are proud of your accomplishment. But you must be realistic about the practice’s deficiencies and correct or improve what you can.
Put yourself in a prospective buyer’s position the next time you go to your practice; pretend you are a buyer looking at it for the first time. How impressed are you? With this in mind, make the necessary improvements.
Maintain Full Practice Operations
Once you start thinking about retirement, it’s tempting to cut back on your working hours or patient load. However, this can negatively impact your practice valuation. Your active patient count is a key asset for the value of your practice.
- A strong base of active and returning patients indicates ongoing cash flow for the practice. Cutting back on office hours, procedures, and insurance plans will also hurt the value of your practice. As a result, you should maintain full operations before and during the selling process.
Determining the Value of a Dental Practice
Once you’ve established your transition goals, team, and overall plan, the next step is to determine what your practice is worth. In doing so, not only will you want to know what your practice is worth today, but you’ll also want to understand how to maintain its value until you are ready to sell.
Get a Professional Practice Valuation
The practice valuation should be conducted by an experienced dental practice advisor or an accounting professional who’s familiar with dentistry and understands the current marketplace for practice sales. Your advisor can then help you identify the right listing price by using one of the common valuation methods:
- Rule of Thumb Valuation
- Market-Based Valuation
- Cap Rate Valuation
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Seller Financing Options May Increase Sale Value
You may want to finance part of the sale of your practice especially if the buyer is a recent dental graduate. Seller financing may help close the deal and seller-financed practices generally sell for higher prices. Consult your CPA. The allocation of the asset purchase value determines the seller’s financial tax obligation.
Asset Allocation Considerations
Asset allocation is the portion of the total sales price that is assigned to each of the various non-building assets being sold. This includes, but is not limited to patient data, furniture, supplies, equipment, and the non-compete covenant. The percentage of your sale price associated with the assets could change the amount of income a seller is liable for with the IRS.
For example, if a practice sells for $1,000,000, and 40% of that price is tied to necessary capital assets, the remaining 60% would be hard assets for which you’ll be taxed. Conversely, if you managed to allocate 80% of your sale price to intangible capital assets, you would only be liable for 20% of the hard assets.
In both situations, the practice sells for the same amount of money. However, in the second example, the seller would end up with close to $100,000 more income than the former situation.
The State of Your Practice’s Online Reputation
Negative online reviews left unresolved can hurt your dental practice. Reviews are often used in the valuation process because they give evaluation-based insights into how you run your business.
Even great dentists get bad reviews, so it’s important to promptly and professionally respond to them. This allows you to resolve issues, which in turn can generate an updated, positive review.
Transition Tip:
Great reviews are connected to great patient loyalty. Positive comments and reviews of your practice on social media, your website, and other platforms will amplify the worth of your practice.
What Buyers Consider When Evaluating a Practice
As a dental practice owner who has put a lot into your practice, it’s only natural that you would see your practice in a different light than a potential buyer, who is not as familiar with it. However, when deciding to place your dental practice for sale, considering the needs and wants of potential buyers is of the utmost importance. The following are some key things that other dentists will look for when considering to purchase a practice:
Appearance of the Office
First impressions matter, especially when selling a dental practice. Buyers are likely to undervalue practices that aren’t kept up and organized. Keeping your practice neat and in good repair can go a long way in fetching a better sales price. Many buyers are looking for a dental practice that is “move-in” ready. Practices with equipment less than three years old have a leg up on practices with equipment that is old or needs to be replaced.
On the same note, the buyer may ask for an inventory of your equipment and have it inspected to ensure everything works properly. In addition, lenders may require this list before approving a business loan. To get a head start, it is a good idea to put together a list (and include the value of each item).
Practice Financial Documents
Past performance is a good indication of whether a dental practice will be successful in the future or not. For this reason, you must keep organized records showing your past income, profits, and expenses so you can easily prove the health of your practice.
Questionable or unclear financial documents can be a deal killer. Present yourself well “on paper,” look at your financials from the perspective of your buyer, rethink all those “perks” and hidden assets, and make sure the financials are easy to understand.
Also, remember that buyers won’t pay for what you can’t reliably prove. A good buyer won’t be looking at just your practice; they will look at several practices and buy the best one in their price range.
Sale Price & Terms
Sellers always want to sell for as high as they can, and buyers want to buy for as low as possible. To expedite your dental practice sale, you need to ensure that your practice is priced competitively – but that doesn’t mean undervaluing your practice.
If you have the facts to back up why your practice is valued at a certain price, you have a higher chance of selling your practice than someone who has their practice priced by someone unfamiliar with the dental market.
Seller’s Discretionary Income
Many buyers have dental school loans and other expenses to consider when deciding on the right practice – making discretionary income a key factor in the decision-making process.
Make it easy for a buyer to understand what financial benefits they will potentially receive. If any financial benefits to you are not clearly outlined in P&Ls or tax returns, be prepared to explain what they were and why they were a benefit.
Our practice transition specialists can evaluate your practice and re-cast your financials to accurately reflect your discretionary income from the practice.
Financial Leverage
Buying a dental practice is one of the biggest investments a dental practitioner will make, and a savvy buyer will want to ensure that their return on investment (ROI) is maximized. Our practice transition specialists have access to the top lending sources in the industry and can help buyers find a lender that will fund 100% of the capital.
This allows the buyer to purchase a larger practice with a more attractive bottom line.
Lease Terms
Unless you own the building outright, buyers will want to ensure the lease is good before investing in your practice. Generally, the length of your practice lease should be the same as the length of the buyers’ loan to ensure the new owner will be protected.
Timeliness of Communication
Buyers look at several practices when going through the purchase process — and their offers can be withdrawn before they are accepted by the seller. To make sure you don’t miss out on any offers — or that the buyer doesn’t lose interest — you should respond to all offers within a reasonable amount of time.
Preparing to Sell a Dental Practice
Once you receive a formal valuation of your practice, it’s time to prepare your practice for the transition. We’ve put together some important considerations to help you ensure the process is smooth for both you and the buyer.
Set Realistic Expectations for the Purchase Price and Post-Sale Terms
If the asking price is outside of what the market prices are, most buyers will not want to pursue these practices. Additionally, if the seller would like to make an unrealistic wage after the sale buyers will shy away. This is where an experienced broker can be of assistance to you.
Do Your Due Diligence
During the due diligence period, you may need to gather additional information and share with interested parties. This includes history of tax returns, breakdown of staff compensation and benefits, the number of active and new patients, and other financials and practice management reports of interest.
Make sure the financials for your practice are accurate, detailed, and up-to-date. Buyers and banks will want to see your last 3 years of tax returns, as well as, a profit and loss statement through the most recent full month. The preference of buyers is to have Federal Tax Returns for each of a seller’s practices.
Having this information documented and readily available will help facilitate the selling process. The preparedness also displays that you’re organized and committed to making the sale final.
Appraise Your Equipment & Replace or Remove Older Items
This is a good time to see what else needs to be cleaned up or just removed to make the best possible impression. Just because you are selling, now is not the time to let the practice slip. Prospective buyers must see your practice at its best: bustling, and showing no signs of neglect.
Get dental equipment, office furniture, and fixtures appraised. If you have chairs or delivery systems that are more than 20 years old, consider upgrading. This process will increase the desirability of a dental practice and decrease its time on the market.
Transition Tip:
Remove unused and obsolete equipment and inventory. Buyers will not want to pay for it and they may worry that it is getting added into the selling price if they see it lying around.
Assess the Appearance of Your Office Suite
Go through each room of your office suite, organize everything, and look at it from a purchaser’s point of view. Paint, if necessary. The last thing a buyer wants to do is redecorate after they paid a fair value for your practice.
Understand Your Lease and Its Impact on Your Sale
Leases can be an asset or a liability. Know the terms of your lease and how these terms will affect a buyer. Some important questions to ask are:
- Is the lease assumable, or does it require that the buyer negotiate a new lease?
- How does your monthly rent compare to those around you?
- If your lease is coming up for renewal, what are your options and the best approach to renewing your lease?
We recommend you consult with a professional to help sort out your lease options.
Plan on Upfront Disclosures
Disclose all relevant facts regarding the practice. If it is discovered that something was not properly disclosed, this could be the “Tip of the Iceberg” in a buyer’s mind. Some potential issues that could hinder the sale of your practice include:
- Liens
- Leases
- Inactive patients
- Pending lawsuits
- Trouble with the board
Prepare Your Covenant Not to Compete for Contracts
Have written contracts in place with your associates. Prospective buyers will shy away from a practice when the goodwill could go down the street with an associate. Also, be prepared to sign a covenant not to compete with the sale of your practice.
Communicate Your Practice Philosophy
Some questions to help you communicate the value of your practice and your practice philosophy to a prospective buyer are:
- What is your approach to treatment and why have you been successful with this approach?
- What are the primary procedures that comprise your revenue?
- What procedures would enhance the revenue of your practice?
- Why is your practice is a good value to a buyer?
Qualify Any Potential Buyer’s Ability to Secure Financing
Making sure potential buyers qualify for financing is a critical first requirement, as there’s no point in investing your time and effort trying to sell your practice to individuals who are unable to acquire a loan to buy it.
For potential buyers who do qualify for lending, take measures to have them sign a confidentiality agreement and assess their interests to ensure they align with your goals and priorities as defined in step one. In most cases, a practice advisor can handle these duties and vet qualified buyers who will ensure your legacy is sustained and your staff and patients are respected in the process.
Marketing a Dental Practice for Sale
Once the practice valuation and preliminary planning are in place, it’s time to get your practice in front of potential buyers. Like any form of marketing, the more people that learn about your practice for sale, the greater chance you’ll have in selling it.
Marketing your dental practice may involve avenues like investing in online ads, website listings, social media promotions, networking, or working with practice advisors. Experienced dental practice brokers typically have solid networks in place, which can help get your practice in front of qualified buyers.
Whatever marketing strategies you wish to employ, make an effort to cast the widest net possible to attract the most interest in your practice.
Present Clear Messaging About the Reason for the Sale
Prospective buyers will want to know why you are selling. A well-prepared answer will give a buyer a level of comfort, encouraging them to pursue the opportunity to buy your practice. Be clear about your intentions if it is not a retirement sale.
Promote Benefits of Your Community
The area surrounding your practice will dictate the new owner’s professional future and possibly influence the purchase of a new home. If you aren’t aware of the area’s qualities, do some research. Key questions you might want to answer:
- How do the schools rank?
- Are there any nice parks?
- Is there a high population density?
- Is there good food and entertainment nearby?
These are all great selling points to a buyer. Discover them, and include them in your marketing.
Finalizing the Sale of Your Dental Practice
Now that you have started getting offers, you’ll move into the financial aspects of the sale. It’s important to carefully choose the right Buyer based not only on their offer but how you feel about the buyer taking over your practice.
Just because you receive an offer doesn’t mean that you need to accept it right away. Let’s take a look at the important aspect of the financial part of how to sell a dental practice.
Considering Offers and Negotiating
Once you receive an offer / Letter of Intent (LOI) for the purchase of your practice, there are a few primary options you can take:
- Accept the offer terms the way they are presented
- Counteroffer and negotiate the selling price
- Reject the offer entirely
Each option has varying implications. In most cases, declining an offer without any form of a counteroffer is a sign to the potential buyer that you are not interested in that individual taking over your practice. This important step in selling a practice needs to be thoroughly weighed out before immediate conclusions are made. Your advisor can guide you through this important decision-making process.
Finalizing the Transaction
Once you’ve accepted an offer and due diligence has been addressed, it’s now time to close the deal. With the help of your team, documents such as the Asset Purchase Agreement, Bill of Sale, Lease Assignment, letter to your patients, and termination letter to staff (if applicable), need to be drafted, reviewed, and approved by all parties. Carefully reviewing documents and the terms is critical to ensure a smooth transition.
Best Way to Sell a Dental Practice: Consult the Experts
Qualified transition consultants help facilitate the process of selling your practice in a way that makes everything much smoother and stress-free.
At US Dental Transitions, we offer knowledge gained from decades of experience handling thousands of dental practice transitions. Not only do we provide experienced counsel for buying and selling a dental practice, but some of our advisors were successful dentists and practice owners themselves. They serve as trusted advisors in the valuation, negotiation, and final steps of the transition.
At our core, US Dental Transitions was founded by a dentist with more than 25 years of experience, so we truly understand the complex, emotional and financial ramifications of perhaps the biggest change in the life of a practitioner.
If you intend to continue your legacy by selling to a dentist who will honor your desire to care for your patients and staff, we’re confident we can connect you with a buyer who can meet your selling criteria.
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