THE DENTAL TRANSITION NEWSLETTER
Published on
- 15-06-2024
Pre-Transition Tips for Success
Getting close to retirement? Here are a few tips that will help
make your practice more desirable and valuable in the market.
Stay on the Throttle!
When doctors approach retirement, a common challenge with practice values is that the hours of operation are decreased. Since the value of a practice is determined using the past 3 to 4 years of financials, it’s important that the practice continues producing optimal results. If at all possible, maintain your hours of production and quality dentistry and your financials will be where they need to be.
Control Your Overhead
Quick tip on just a few categories… staff, rent, supplies, and lab. Try and get these numbers down if possible. Overpaid staff members have a negative impact on net income. The annual Staff Wages Category on your P&L should be managed within a 24% to 26% range of the total annual receipts. It’s extremely difficult to have the conversation with an employee that has been with the practice for 20 plus years, that the position pays “x” amount and no more.
Due to the difficulty of that conversation, most veteran employees receive increases and the annual staff wage percentage will run well beyond 26%. Supplies and lab have become very competitive; lab fees may be easily managed to 6% to 7%, and supplies in the range of 6% to 8% of your receipts.
Fee Schedule
Keep your fees current; not only does it maximize your net revenue it takes the pressure off of the buyer not having to raise them immediately. This category is fairly simple to accomplish, call Hemmen & Associates, Inc. for fee survey results.
Real Estate
Rent is the most negotiable expense in your business. We see dentists who have been in the same space for 10 plus years and have never renegotiated their lease. The standard increase is 3% per year and it compounds. Through the years it will increase substantially, so when you speak with your landlord, address renegotiating your lease. The worst case scenario is that they say no. Understand the market prior to approaching your landlord and know what the current rates are. A good time to approach your landlord is about 12 months out from the expiration date…you may also hire a professional to do this for you.
Since you will be transitioning your practice be sure to consult an attorney about your plans to sell and whether or not the lease language is in your favor for such an event.
Staying Modern with New Technology
Much of a practice’s value is based on financials; the equipment that is able to produce that revenue (whether or not it’s new) is the equipment that shaped that value. The challenge is buyers want “new” and because of that they may be reluctant to move forward with a purchase or may offer much less. An outdated office will be noticed immediately so you might want to consider updating it. If you are not going to sell your practice for a few years – you may benefit from the updates by writing off the expense and you will likely get a greater return when you sell your practice.
Accountant and Financial Advisor
Be sure to visit with your Accountant and your Financial Advisor to determine if you are prepared financially to transition your practice.
Family Members in Your Practice
Having family members working in the practice is not unusual but when it comes time to sell, their employment may pose a challenge. For example, having a spouse as an office manager; nine times out of ten she/he may want to retire or leave at the same time as the seller. Having the selling doctor AND the office manager leave may be a deal breaker for a buyer. You want as little change as possible in a transition. Our suggestion is to have a succession plan in place where these members leaving will not impact the practice negatively.
Call Henry Hemmen & Associates,
Practice Transition… “Buyer and Price”
Many doctors are not aware that there are several types of buyers. The correct buyer for a practice will depend on the desired outcome of the seller. If the seller plans to walk at the close, then focus will be on the Individual buyer or possibly a Small Group “SG” but almost never a major Dental Service Organization “DSO”. If the seller wishes to continue practicing, possibly all will fit the bill but most definitely SG & DSO.
Since every practice is unique and today’s transitions are much more complex than the handshake and transfer of keys that may have occurred decades earlier, the seller will be making a mistake if not seeking the assistance of an experienced practice broker.
Be certain that the Individual, SG, and DSO will have one. For many living in the Midwest rural areas, the SG purchases are becoming more prevalent while the DSO activity is becoming less and less.
Metropolitan practices are usually more aware of the DSO and SG existence, as they have likely received mailers and soliciting phone calls. This article will review what buyers seek in a practice, how offers may differ, and pricing. NOTE: The pricing section pertains to all transactions (Individual, SG, or DSO)
Practice attributes commonly sought by DSO/SG include:
- Profitability
- FFS or PPO based practices (Some DSOs will consider
practices with an HMO component.) - Practices producing minimum 700K+ in gross
collections DSO…SG may consider lower - 5 or more exam rooms
- Retail or superior exposure/signage
- Large populated areas or surrounding areas to pull
from - Seller willing to stay post transition for a minimum of
2 to 3 years with DSO…SG may consider less - Fully digital with recently upgraded equipment
(that’s what everyone wants…right?!?!)
Both the SG and DSO will likely be in a position to offer more than the individual purchaser due to lower costs. Their administrative staffing costs may be shared with several practice locations and the number of supplies, lab equipment, technology…etc. that they purchase demand significant discounts. They benefit from Economies of Scale (economies of scale = the more purchased, the higher the discount).
The DSO will likely offer more money but will do so with higher expectations. They often expect the seller to accept a percentage of the offered price at close and agree to holdbacks with production requirements.
The DSO will likely offer more money but will do so with higher expectations. They often expect the seller to accept a percentage of the offered price at close and agree to holdbacks with production requirements. Holdbacks are usually split equally over the term of the deal. When production levels are met a full payout of the holdback may be expected and with negotiation may include production bonuses when exceeded. Be aware, a less than full payout of the holdback may occur when production levels are not met.
Small groups may handle it differently and the purchase offer will likely be less than that of a DSO; the purchase price is paid up front with an employment agreement that is more user friendly to the seller who wants to practice but at a slower pace. Typically, the seller working as an associate for a DSO or SG will be paid anywhere from 28% to 35% of their personal net collections.
Small groups may look to the seller as a trainer for the associates they plan to introduce where the DSO looks to the seller as a major producer. Some welcome the DSO opportunity while others have wants/desires that are better suited with the Small Group or Individual buyer.
Small groups may look to the seller as a trainer for the associates they plan to introduce where the DSO looks to the seller as a major producer.
PRICING…what drives it?
Proper dental practice valuations will consider many different aspects of the practice; the most important being earnings. The lower the cost (overhead) the higher the earnings, and the more valuable the business.
The model for dental practice appraisals has evolved over the years; but the formula has always incorporated EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) when determining the value.
As written earlier, SGs and DSOs with proper business plans and policies in place are successful due to economies of scale. Greater purchase amounts equal greater discounts which equate to lower costs per category.
Lower costs produce higher EBITDAs thus greater value. Plugging their expense percentages into the existing practice categories increases the value which allows them to offer larger amounts.
It’s all about valuing the practice properly, marketing, and finding the right buyer for the practice that will fulfill the seller’s desires.
It is important to have broker representation, there is so much involved in a transition. Many sellers have little to no idea. You may be certain that the buyer, whether an Individual, Small Group, or Dental Service Organization will have a professional guiding them. The seller that allows the buyer to control the transition will likely come out on the short end; much more than the cost of a broker. It’s all about valuing the practice properly, marketing, and finding the right buyer for the practice that will fulfill the seller’s desires. Shortcuts may seem less expensive but usually cost the seller dearly; which seems silly when they could be easily avoided.
To discuss your transition or to have a practice valuation conducted, contact Hemmen & Associates, Inc. at 1 800-745-1438