THE DENTAL TRANSITION NEWSLETTER
Published on
- 06-15-2024
Good Advice Before Listing Your Practice
The decision to retire is a big one; it’s one of the biggest decisions of your life and not only changes your daily routine, but also your future. If you retire too early you can grow bored, or worse, you may not be able to afford the lifestyle you always imagined. Retirement is not a decision to take lightly and before making the commitment to retire, there are many things you need to consider. The practice needs to be in a good position for a sale so that you get the best price possible, especially if this money is needed for your retirement. In this article, we will discuss some points you need to consider ensuring that you and the practice are ready for a sale.
One of the first things to decide is if can you afford to retire. Do you have enough money saved to comfortably afford the lifestyle you want? Or, are you depending on the sale of your practice to fund your retirement? Do you need a specific amount from the practice sale in order to afford retirement? Will you need to keep working at least part-time to afford your retirement lifestyle? These are important questions to ask yourself and discuss with your financial advisor. If you are not financially ready or do not have a financial plan in place, then you may not be ready to sell.
Once you make the decision to retire, it isn’t yet time to celebrate—at least until the practice is officially sold and the deal closes. Until then, we tell sellers to act like every day is your first day in practice! This means that you should keep up with your production—don’t slow down or you may risk buyers worrying about the value of the practice (and offering less money), alerting your staff to the fact you are trying to sell the practice, and hurting the money you personally bring in. You should also keep the equipment in good shape; if something breaks, fix it.
Don’t let potential buyers come to your office and see two broken x-ray sensors and a torn, inoperable chair. You should also ensure that the office looks aesthetically pleasing. Keep the carpets clean, make sure the practice has a nice coat of paint, and is tastefully decorated with neutral decor. A drab, dirty, run-down looking office is not going to attract buyers. These things require an investment but make a world of difference to potential buyers!
While keeping your equipment in working condition is important, you shouldn’t purchase a significant amount of new equipment. Adding digital x-rays or a CEREC machine isn’t going to add enough value to the practice to pay for itself if selling within a couple of years. Instead, save the money you would spend on that equipment, and let the buyer decide exactly what new equipment they want in the office. This isn’t to say that you shouldn’t buy any new equipment; if something breaks (a compressor, sensor, etc.) then repair it or replace it with something comparable.
Clean up your accounts receivables and credit reports. If you have uncollectable, old receivables, write them off and get them off of your books. There is no reason to keep these monies on your reports if they are never going to be collected. When a buyer sees a large percentage of over 90-day receivables, it raises a red flag. Does your staff do a poor job at collecting, do you allow a lot of patients to pay slowly over time, is there fraud in your practice, or do you just let a lot of money slip through the cracks? Similarly, you should also clean up patient credits. If you have a lot of patient credits, it worries a buyer that you are not submitting the proper amounts to the unclaimed funds account, and they might encounter an audit after purchase of the practice.
A buyer may also worry they’re required to do work for these patients without the benefits of the payments they’ve already paid you. And, depending on how you handle the accounts receivable in the sale, you may end up paying the buyer for these credits or writing checks to all of these patients anyway.
Once you decide that you are ready to sell, you should hire a reputable broker who’ll perform a practice valuation, so you know what to expect as a selling price. Do your homework when hiring a broker and don’t hire the person who simply promises to get the highest price for your practice without doing a valuation. Anyone can promise to get a high price for your office, but not everyone will come through with this promise. You need to hire someone that looks at all aspects of the practice— the production and collections, staff, equipment, location, profitability of the practice, and potential of the practice before they determine a value. Buyers are much more business savvy these days and do their homework on what to pay for practices.
They also know enough to hire good advisors to keep them from overpaying. Even if you find a buyer who is willing to overpay for your practice, their bank won’t finance it unless the practice is worth that amount. The last thing you want is to spend time and effort finding a buyer, negotiating a price and conditions, getting attorneys and accountants involved, only to find out that banks are not willing to finance the full value of the buyer’s loan request.
You should also talk with your broker about a realistic timeframe for the sale of your practice. Just because you are ready to sell does not mean that there will be a line of buyers ready to buy your practice. Unless you have a million-dollar, fee for service practice located in a prominent suburb, you are not going to have buyers lined up around the corner to buy your practice. Even when you find the perfect buyer, the process takes time.
The buyer will need to visit the practice at least twice, have time to review the financials with their accountant, negotiate basic terms for the letter of intent, obtain buyer financing, complete their due diligence, and work through the purchase agreement to get to the closing. It is a lengthy process, but having a reputable, caring broker (like Henry Hemmen & Associates) will make the process as painless and profitable as possible so you can enjoy retirement!
What Our Clients Have To Say About Us Matters
“Henry Hemmen & Associates held my hand the entire time and went out of their way to help me make it happen. Whenever I had a question, there was always someone there to answer it for me. Their professionalism is top notch, I wouldn’t hesitate to recommend their services.”
– IA General DDS
“Henry Hemmen & Associates gets things done. I had tried through various means to sell my practice for almost three and one-half years. After retaining Henry Hemmen & Associates, the practice was sold within five months at a price that both the purchaser and myself felt very comfortable with.”
– IL General DDS
Doctor, Don’t Sign the Office Lease!
As a practicing dentist with your own practice, more than likely, you have a lease on your office. Perhaps you even required your lawyer to scour it before signing. And maybe you’ve required concessions and allowances from the building owner. Or, if you are just starting out in your practice, you will have paid some attention to the lease; the bank providing the financing will require that you have a lease long enough to cover the term of the loan. But the lease is just one item of many that you have to deal with when starting out.
In any case, you will have initially discovered that virtually everything in a real estate lease is there to protect the interests of the landlord/property owner. Furthermore, there is very little of the language in the lease that is negotiable.
Depending on the landlord, you may have the opportunity to negotiate the monthly lease amount. If it is an individual owner, they may be more flexible depending on each individual circumstance. Additionally, the owner may offer options to renew, which are beneficial to the lessee because they are cost-free and may allow you to stay in the building even after the lease has ended.
Depending on the length of a lease or a renewal, the owner may offer an allowance to upgrade the interior of your space.
Chances are that after that initial scrutiny, you have continued to renew it without paying much attention to the renewal. As the years pass, dentists often overlook or neglect to ask for critical changes to the rental agreement.
When you first negotiated the lease, your spouse may have been required to sign the lease as well. But, after you have completed the initial term of the lease and have proven to be a dutiful tenant, your spouse should be removed from the lease. Otherwise, you may encounter problems in later years, especially in the case of a divorce or separation.
During the initial term and any subsequent renewals, require that the lease be re-assignable to another dentist who may want to purchase the practice. Permission to assign the lease is usually only permissible with the approval of the landlord, but you want the further provision “… that such approval shall not be unreasonably withheld….”
Without this provision, the owner may “hold you hostage” when you want to sell the practice. The new buyer could be rejected out of hand or be forced to negotiate a new lease at higher rent—something that could kill the sale.
You should remember that if you assign the lease, you will be secondarily liable for the rent if the new tenant defaults on the lease. Dentists buying other dentists’ practices are overwhelmingly successful; banks financing dental practice acquisitions have had a loss ratio of less than ½ of 1 percent.
So, while the risk of default may be negligible, you should nevertheless be aware of it. And, wherever possible, have the buyer get a new lease that will take you out of the picture completely.
The next feature you should request will become more important as you get older, but, can also be very important at any age. Ask the building owner to include a provision for the termination of the lease in the event of your death or disability.
This may be harder to get and will depend on the individual property owner. But it is not unheard of to obtain such a provision, usually with the payment of 3 to 6 months additional rent at termination.
You can try to include a termination based on your retirement but that may be harder to accomplish. Still, it never hurts to ask. You are a valuable tenant, as dentists usually invest in their premises in the form of leasehold improvements. As a result, moving is usually very expensive and they are most often long-term tenants in the property.
Another section of the lease to examine is the section regarding the destruction of the property. This section will spell out how much time the building owner has to decide to repair or rebuild the property. It might be 60 to 90 days for a decision, which doesn’t include the time it actually takes to complete the repairs. This is critical to you because it is difficult, if not impossible, to find temporary quarters for a dental office. In the case of temporary relocation, the insurance agent or the law firm can find a nearby store front, rent furniture and computers, install phone lines and internet, and you can be back to helping your patients.
If the landlord is unwilling to change this section of the lease, you should protect yourself with “business interruption” insurance to prevent catastrophic business loss if the unthinkable happens.
Finally, more often than we would expect, we find dentists practicing without a lease at all. They are operating on a month-to-month basis. In most cases, they signed an initial lease, but once it expired, they continued paying the rent without any form of a lease extension or renewal.
Month-to-month means that they can be expelled from the premises with only 30-days-notice. Often these dentists are happy with the arrangement because they feel like they can quit at any time with very few complications.
While that may be true, they are taking a risk. The building could be sold to a new buyer who wants it for his or her own business, or to a buyer who wants to demolish the building.
In one case, a seller had been on a month-to-month basis for most of the last twenty years. When the buyer approached the property manager about a lease, he was told that he could not get a lease. The building owner was planning to redevelop the space to attract a larger tenant.
The new owner could only get a 6-month lease knowing that he would have to move his practice within the year. This had a major effect on the price the buyer was willing to pay for the dental practice.
Laws vary from state to state so consult a real estate attorney in your area regarding leases. If your original lease lacks any protections, consider negotiating for those during the next lease renewal. The sale of your practice and/or the value of your practice may depend on it.