Top 10 Questions Dentists Ask When Buying or Selling a Practice
1. What’s the value of a dental practice?
The value of a properly appraised practice is a function of two factors: Risk and Net Income. The greater the risk to success in a practice, the lower the interest from buyers. Higher risk translates to lower practice value. Valuing a practice involves the review of three years of financial information and other practice management reports. While value is heavily influenced by the most current year of cash flow, to properly assess risk, a full analysis must be conducted. Value simply cannot be based on one or two points of data or rules of thumb, or be made “on the spot” without careful review.
2. What can increase or decrease value?
Fewer specialty services (in a general practice), less discounted fees or insurance (especially HMO/capitation), more stability, higher gross and higher net income yields higher value. Aesthetically, though, the more visibly appealing a practice is, the more a practice will sell for. Note, that this will not necessarily affect the appraised value, but may affect the sale price. Importantly, some procedural and nearly all financial modifications to increase value may necessitate longer range planning (3-5 years out) to provide a return. Major equipment or aesthetic changes most likely will not yield a justifiable return in the immediate short term.
3. Can you provide an overview of the transition process?
After finding a practice, the purchaser makes an offer which the seller can accept, decline or counter. The offer should establish the general framework (price, anticipated closing date, restrictive covenant terms, whether there will be a transfer of real estate) for the purchase agreement that will be developed. Once the offer is accepted, the purchaser applies for financing (if applicable) and completes the in-office due diligence. Concurrently, purchase agreements (and lease, if applicable) are developed and reviewed by seller and purchaser’s counsel. Once documentation is finalized and financing is secured, a closing date is set and the staff notified. Many steps, if done incorrectly, can adversely affect future steps and jeopardize the sale, so it is important to consult with an expert.
4. What is a Covenant Not to Compete / Restrictive Covenant?
The Restrictive Covenant establishes a time and geographic area within which the selling doctor agrees to not practice or participate in another practice after a sale. The seller is also usually restricted from soliciting patients or staff. The area for the Covenant is unique to each practice and location, and is usually correlated to the service area of the practice (where most of the patients live/work) taking into account local and regional factors. Time limits are often established by state law or jurisdictional court rulings and can be months (if at all) to a number of years.
5. Are Restrictive Covenants enforceable?
When properly developed and reasonable in its terms (distance and/or time), covenants are definitely enforceable in most areas. The specifics of the covenant are very important and defined by local laws. Since a restrictive covenant is vital to almost every transition, it is important to consult with a local transitions expert and legal counsel to verify the statutes and ensure legality of a covenant. That said, in all states but Alabama (others does not allow them for employees), Restrictive Covenant contracts are enforceable and care should be exercised when drafting them.
6. Will the staff stay in a transition?
The staff typically is as worried about keeping their job as the purchaser is about keeping them. If they leave, they have to start working for a new doctor and with a new team with a new set of expectations, benefits and a reset on their seniority. This amount of change sets a high incentive to stay. With a proper transition strategy, the staff should stay in place unless the purchaser lets somebody go or somebody was already set to retire. In the case that they were ready to retire, this should be disclosed throughout the due diligence process.
7. Will the Seller’s patients accept a new dentist?
The patients of the practice will accept a new doctor if the introduction and transition are handled the right way. The seller’s endorsement, coupled with staff acceptance and enthusiasm, is key, but the purchaser’s participation in creating a steady environment over a period of time will enhance acceptance significantly. Generally speaking, we see that patient retention is in the mid to high 90% range knowing that those that travel from out of the area and some others may not return, but the vast majority will and give the new doctor a chance if the transition is handled correctly.
8. How do you appraise or value a practice?
No valuation is made on one year’s data alone and metrics such as percent of gross or multiple of net are not accurate appraisal values. A true appraisal process includes evaluation of several different methods of correlating value to residual net income of a practice after reasonable expenses, including all those to produce the dentistry are deducted from the gross income. There are methods that are generally accepted in the business valuation profession, legal community and banking industry that can be applied to valuing a practice. Appraisals should have detailed documentation that review the methodologies examined to determine final value.
9. Does my dental practice need to be a certain size to accommodate an associate?
There are generally recognized minimal requirements for a full-time associate which include office size (square footage and operatories), production levels, available staffing, new patient flow and overall transition plans. That list is just the beginning and a careful evaluation is really necessary to ensure whether a need or opportunity is really there and, if so, to make sure the addition of another doctor goes smoothly. If you are contemplating this in the near term, we suggest that you contact a transition specialist to determine your needs.
10. What is Dual Representation and Transactional Brokerage?
Dual Representation is the practice of representing both the seller and purchaser in a brokered transaction and being paid by both. In many states, this practice is illegal. Not only is it illegal, it is unethical. Transactional Brokerage is the practice of representing neither party, but rather, the transaction itself. This usually provides shelter for a Broker whereby they minimize their responsibility for accuracy and disclosure.
— Originally published in Dentaltown Magazine, August 2011
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