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11 Questions to Ask Yourself Before Selling Your Dental Practice
If you anticipate selling your dental practice in the next five years, here are eleven questions to ask yourself about preparing your practice so that it is attractive to buyers and helps you obtain top dollar on the sales price.
1. Can I afford to sell my practice?
Verify that you can afford to sell your practice. If you have never had a financial plan prepared, now is a suitable time to have one done. Often, potential sellers may be emotionally ready to sell, but financially unable to do so. With cycles of instability in the financial markets, you may find that you’ll have to put your plans on hold for a few more years, or conversely, you’ll feel confident that the practice sale proceeds will only enhance your retirement lifestyle.
2. What are the tax ramifications of selling my practice?
Depending on the type of corporation or legal entity you formed, the tax consequences of a sale will be different. For example, if you are a “C” corporation, there are some issues that must be addressed. How will you allocate goodwill between the corporation and yourself? How tax efficient is the future sale? Getting answers regarding what you’ll retain after a sale is critical when you’re planning to sell.
3. Should I sell the practice myself or work with a broker?
A self-managed sale can require about 150 hours and, to maintain confidentiality, you will need to do much of this work away from the office. If you’re going to work with a broker be clear from the start that they solely have a duty of care to you. Some agents work for both the buyer and seller, which creates a conflict of interest.
4. How should the sale agreement be structured?
There are numerous ways to structure the sale of a dental practice. It is recommended that you be represented by a business law attorney with experience in dental practice sales. Your lawyer will ensure that the sale agreement is well-structured and that it effectively protects your rights and interests.
5. How important is it to value my practice?
It is important to have an up-to-date certified valuation of your practice, which is based on the current market and cross-checked against comparable sales. Comparable sales need to be from your geographic area and for practices of a comparable size and style. Be sure to consider a full valuation of all the physical attributes of your practice, including the location, office, equipment (including the purchase date, estimated replacement date, and other relevant information), and other items that go into a detailed analysis. In addition, a practice valuation must consider intangible assets and goodwill, which often make up a sizeable portion of your practice’s assets.
6. Are my expectations realistic about what my practice is worth?
Like other business owners, dentists can have an inflated view of how the market will value their practices. For instance, they may assume that a buyer will give them three to five times earnings before interest, taxes, depreciation, and amortization (EBITDA), which traditionally has been what privately held small businesses could expect in a sale. But it’s not always that simple.
Consider the dentist who is between 55- and 65-years-old and close to retirement, who has patients who are in the same age range. To be candid, older patients are depreciating assets. That means there could be a substantial gap between the paper worth of the practice and what a buyer is willing to pay for it. This is one of the main reasons that dental practice owners should not be too reliant on a potential liquidity event to fund their retirement.
7. Should I increase my fees?
Get a fee and/or practice analysis to determine where you stand within the fee percentile range in your area. If you are well below average and still have a year or so to go before the sale, increase your fees. Chances are your patients will accept the fee increase; you will increase your income and enhance the value of your practice.
8. What is the status of my collections?
Remove any uncollectible accounts receivable and make every effort to collect those accounts that are past due over 90 days. Uncollected payments will adversely reflect your negotiations with potential buyers.
9. Do I include my property in the sale?
If the practice premises is freehold, you need to decide if you plan to sell the property with the business or create a lease. There are merits with both options, and it will come down to personal choice, investment strategy, and the need to raise capital.
10. Can I start cutting back my hours since the practice will be sold?
Do not reduce your schedule or stop accepting new patients. Potential buyers want to see that the practice is prosperous.
11. Do I need a non-solicitation clause for my patients and staff?
Make sure that you have a non-solicitation clause for patients and staff. Ask your attorney to draft a covenant if you do not already have one in effect.
Your answers to these questions – and your resulting actions – will set you on the right path to sell your dental practice. Take the time in advance to avoid complications later. Gulf Coast Accounting & Tax Services can guide you through this process along with other appropriate advisors.
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