How to decide when to sell your dental practice: Critical factors and strategies

Selling your dental practice is one of the most important decisions you will make in your professional life. Therefore, it is imperative that you put a great deal of thought into when and how you would like the transition of ownership to occur. This article provides some insight into the key considerations you should take into account when planning your practice transition.

Start with WHY

Any decision of this magnitude should start with clearly defining why you are considering selling and the goals that you are looking to accomplish. Here are the most common reasons that dental practice owners sell their offices:

• Retire or relocate
• Reduce risk by taking some chips off the table
• Achieve financial freedom
• Decrease work schedule and/or production responsibilities
• Reduce burden of management
• Fuel practice growth and development
• Attain a better work/life balance
• Pursue other passions
• Death or disability
  
  

Choose a transition strategy that meets your individual needs

Once you have defined why you are selling and what you would like to accomplish as a result of the sale, it’s time to choose a transition strategy that meets your unique needs. There are countless ways to sell/transition a dental practice, but here are several proven transition strategies that we utilize to help our clients achieve their goals:

• Walk-away sale/short-term transition. Sell 100% of the practice (typically to a private buyer). The seller either walks away at closing or provides the buyer with transition assistance for a short period of time postclosing (typically four to six weeks).
• Sell and work back. Sell 100% of the practice to a private buyer or DSO. The seller continues working in the practice full-time or part-time for a predetermined time frame following closing.
• Associate to purchase (phased transition). Sell 100% of the practice to a private buyer in one to two years at a predetermined purchase price or predetermined formula for calculating the purchase price at closing. The buyer works as a full-time or part-time associate in the office for one to two years prior to the transition of ownership. This transition strategy typically works well in the case of a larger practice (revenue of $800,000-plus and five-plus ops) where the seller desires to cut back their work schedule but retain ownership of the practice for a couple of years prior to the sale.
• Sell to a DSO. Sell 51%–100% of the practice to a DSO buyer. Selling to a DSO buyer can result in the seller receiving a significantly higher value for the practice compared to selling to a private buyer. However, the premium paid by a DSO usually comes with some conditions that must be met in order for the seller to receive the full purchase price. In most cases, the seller will be required to have a vested interest in the practice for three to five years following the sale, which could involve working chairside and/or simply overseeing the operation of the business. The practice may also have to maintain a certain revenue or EBITDA level postclosing for the full sales price to be earned by the seller.
  Selling to a DSO can accomplish several objectives that sellers often desire to achieve via the sale of their practice, including fulfilling financial goals, the ability to continue working in the office and earning an income indefinitely following the sale, and substantially reducing the burden of management. By retaining partial ownership in their offices, sellers may also have the ability to receive ongoing net income distributions and participate in future recapitalization events (which can dramatically increase the overall proceeds from the sale).
• Partnership. Sell a partial interest in the practice to a private buyer. Entering into a partnership can potentially allow a seller to accomplish their financial goals while providing flexibility in regard to the seller’s work schedule and decreasing the seller’s management burden. However, partnerships require a great deal of diligence to determine if the personality and practice philosophy of the partners are compatible. It also requires a detailed partnership agreement that clearly defines how doctor compensation and net income distributions will be calculated and how situations involving partner disagreements, buy-ins and buy-outs, death, disability, etc., will be handled.

Choosing and executing the transition strategy that best meets your individual needs is key to ensuring a successful sale and smooth transition of ownership for all parties involved.

Financial considerations

For many doctors, their dental practice is one of their most valuable assets, and the proceeds from the sale of their office will be utilized to fund a significant portion of their retirement. Therefore, it is crucial to understand the key factors that influence the value and marketability of your practice to ensure that you are in the position to maximize the value of your office at the point of sale.

There are a number of factors that can significantly influence practice value, including the type of buyer/transition (individual doctor vs. DSO), revenue levels and trends, profitability (net cash flow vs. EBITDA), type of patient base, type of dentistry, location (urban vs. rural, high visibility vs. low visibility), quality and age of equipment, curb appeal, etc. While the historical average sales price of a dental practice on a national perspective is approximately 70% of the most recent year’s revenue, over the past year we have sold practices for as low as 50% of revenue and as high as 300% of revenue based upon the type of transition strategy utilized and the unique attributes of each office.

The first step in the transition process is to obtain a practice valuation from a local, reputable practice broker to determine the current market value of your practice and chart a path to reaching your financial goals.

It is also important to remember that selling your office is not synonymous with retiring, as there may be opportunities for you to continue generating personal income following the sale by working as an associate in your office, working as an associate outside of your noncompete radius, receiving net income distributions (DSO sale with retained ownership interest), or participating in future recapitalization events (DSO sale with retained ownership interest). Once you have determined that you are financially prepared to sell your practice, it’s time to move on to considering the emotional implications of the sale.

Emotional considerations

We have found that the emotional process of selling a practice often plays a more significant role than the financial implications. For many practice owners, it is extremely difficult to consider selling their practice due to the emotional ties the doctor has to their patient base, staff, and the business they have spent their entire career building. These emotions can be even more intense for those doctors who do not have other interests or hobbies outside of practicing dentistry. Therefore, it’s important to ask yourself these questions before making the decision to sell:

• How strong is my emotional connection to my practice?
• What interests or hobbies do I have to keep me busy following the sale of my practice?
• Am I ready to give up control of my practice?
• If you plan to continue working in your office following the sale, are you willing to adopt an associate mentality and be accepting of change?

It is also worth mentioning that the emotional implications associated with the sale of your practice will increase once you accept an offer and begin navigating the closing process. By asking yourself the above questions and dealing with these feelings prior to putting your practice on the market, you will be in the position to minimize your anxiety as you navigate the transition process.

The importance of planning ahead

As sell-side advisors, we are often contacted by practice owners on the day they are ready to sell. While we are certainly prepared to help dentists who find themselves in this position, it is far from ideal. By waiting until the last minute to plan their transition, the doctor’s options are relatively limited in regard to the type of transition strategy they can utilize to sell the practice. As is often the case, the doctor has also taken their foot off the gas in recent years, resulting in a significant decline in revenue, profitability, and practice value.

To avoid these mistakes, we encourage you to develop a relationship with a local, reputable practice broker well in advance (three-plus years) of your practice transition. In doing so, you will gain valuable insight regarding the current value of your practice and the key factors that impact practice value and marketability. This information will also provide you with sufficient time to develop a customized transition strategy to meet your individual needs, make changes to your office that will enhance practice value, and avoid mistakes that may negatively impact value.

Given that the dental industry is evolving rapidly and macroeconomic conditions are constantly changing (e.g., consolidation fueled by private equity-backed DSOs, rising interest rates, increasing overhead costs, etc.), it is more important than ever for potential sellers to plan ahead, explore their options, understand the factors that influence value, and employ the services of an experienced advisor to serve as their advocate and guide them through the process. We encourage you to contact McLerran & Associates to schedule a free, confidential consultation to discuss your practice and how we can help you accomplish your goals. 

Editor's note: This article appeared in the September 2024 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.