10 Considerations for Selling Your Dental Office: Strategy

Selling a dental office can be a daunting task at best, and many homeowners may not be aware of the relevant considerations when preparing for and conducting such a sale.

Whether you’ve got into discussions to sell your dental practice or want to sell your practice in the next few years but don’t know where to start, the following 10 considerations will help ensure you get what you want from a sale while maximizing the value of your clinic and allowing a smooth transition to the buyer.

1. Ownership structure

An important consideration up front is the ownership structure of your practice; specifically, consider the amount and type of stocks that individuals own. If your dental practice is structured properly, you may be able to significantly minimize the tax payable on a sale so that you can keep the vast majority of the proceeds from the sale.

For example, the fact that certain shares are owned by family members can have beneficial tax consequences in the event of sale, while complying with applicable laws regarding the ownership of shares in dental companies.

2. Agreements with other dentists

Have you discussed or made promises with any associated dentists in your practice or with outside dentists regarding the sale of your practice? Be aware of such discussions and promises, as they may restrict the ultimate value of your practice or your ability to sell. Although granting someone the right to match any offer to purchase your dental practice may not have short-term implications, such arrangements become major concerns as you move forward with a sale.

3. Expectations after the sale

After the sale is complete, do you intend to fully retire, reduce your work hours, or continue as a full-time associate at the clinic? Consider what you would like your post-sale professional life to entail, as that will relate to the timing of the sale and the value of your practice to the buyer.

Keep in mind that in almost all cases, a buyer will require a non-compete covenant limiting their ability to practice for a competitor for a period of time after the sale.

Agreeing to stay in the clinic full-time or in a significant capacity for several years after the sale will generally help increase the value that a buyer is willing to pay. On the other hand, permanently walking away once the sale is complete tends to significantly lower the purchase price. As such, it is often beneficial to consider selling your practice before you intend to retire. While the ideal timing of a sale and the valuation of your clinic will depend on the nature and structure of your practice, it is common to see an owner agree to continue practicing in the clinic for five to seven years after the sale in order to maximize the purchase price.

4. Increasing valuation

Because most of the value of a dental practice comes from the goodwill of the clinic, there are a number of ways you can help increase the value of your practice to the buyer. In addition to remaining as an Associate Dentist after the sale, you should consider the following best practices to maximize the value of your practice:

1. keep personnel costs under control in the years leading up to a possible sale;
2. make sure your balance sheet accurately reflects the business operations of your clinic and nothing else; and
3. Ensuring that your dental business is sustainable after a sale by properly documenting agreements with partner dentists who work in your practice and entering into other contracts as appropriate.

5. Choose a buyer

Three types of potential buyers for your dental practice generally include:

1. associate dentists currently working at your clinic;
2. external dentists (who often already have their own clinics); and
3. dental service organizations (often called “dental consolidators”).

Selling to another dentist generally has a lower purchase price due to the availability of financing, but can offer more flexibility when it comes to terms of the deal. Alternatively, dental consolidators can generally offer more cash up front and often also offer equity in your business.

Of course, there are exceptions to the above, and each prospective buyer may offer different terms. The ideal buyer for your clinic depends on what you want out of your sale and is ultimately a personal decision you must make when weighing the options available.

6. The clinic facilities

An important aspect of any sale is the facilities from which the dental clinic operates. If you own the dental clinic facilities, the sale of the practice may present an ideal opportunity to sell the actual property. Alternatively, you may want to retain ownership and act as the buyer’s owner of your clinic.

If you are renting dental clinic facilities, be aware that a buyer will often want to ensure that there is a long-term lease term left, such as five or ten years. Another relevant consideration if you are renting the premises is whether there are onerous transfer or change of control provisions that may allow the landlord to retain your consent to the transfer of the lease.

7. Stabilizing EBITDA

Dental clinic valuations are almost always a product of the practice’s earnings before interest, taxes, depreciation and amortization (EBITDA). A stable EBITDA in the years leading up to a sale tends to indicate less risk to the buyer, which can often mean that less of the purchase price depends on a profit mechanism and instead more is paid to the buyer. closing.

The COVID-19 pandemic has substantially affected business stability, as discussed in more detail in the last section below.

8. Due diligence

The due diligence process involved in selling a dental practice is often onerous and has many components. Well organized records and efficient management systems will allow for an easier due diligence process and, in turn, lower transaction costs for the selling dentist. To that end, keep a copy of all service contracts and other third-party contracts on file, keep employment information current, and ensure clinic finances are accurate and clear.

9. passive

Buyers and buyers’ lenders often demand that all dental practice debts and liabilities be paid (either before the sale or at the close of the sale using funds from the purchase price) and that all collateral be canceled related. Consider this when making practice-related equipment leasing and financing decisions in the years leading up to the sale.

10. COVID-19

There is no doubt that the COVID-19 pandemic has created novel considerations for anyone considering selling their dental practice. One of the main concerns is how the dental practice will be valued; Will pre-COVID-19 EBITDA be used or will the valuation take into account the uncertainty surrounding the practice’s ability to generate the same EBITDA after the COVID-19 pandemic has passed? Many dental office sales since the onset of COVID-19 have addressed this problem by assigning a higher percentage of the purchase price to a profit mechanism.

Another consideration in light of COVID-19 is the effect that a mandatory closure of all dental clinics will have on the scheduled closing date or any post-sale profit-making mechanism. Given the material risk of mandatory closings, these matters require careful consideration and must be addressed by the parties early in the sales process.

The content of this article is intended to provide general guidance on the subject. The advice of specialists should be sought according to your specific circumstances.