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Compendium
July/August 2022
Volume 43, Issue 7

Hitting a Home Run When Selling Your Practice

Josh Swearingen

Many dentists have built a successful business throughout their career only to come to their last few years wondering what their next steps could be. How do you prepare a practice for sale? What can you do to ensure ongoing operational performance and maximum valuation? To borrow a baseball term, how do dentists "hit a home run" when selling their business?

While no process is bulletproof, there are some steps dentists can take to help maximize their exit from ownership and ensure a successful transition to the next phase of their career. The following suggestions, while not an exhaustive list, represent some basic strategies dentists should employ when starting their quest to "clear the bases."

Have a Profit and Loss Review Early

Start by assessing where you are today from a profit and loss perspective. Ideally, sellers should begin digging into some level of optimization 18 to 24 months before going to market, although a shorter timeline can also yield positive results. When contemplating an exit strategy, seek out a practice valuation from a mergers and acquisition (M&A) advisor that specializes in the dental industry. This can be done quickly and simply and can provide an indication of where the market for your business currently is, and what your expectations could be with some additional time and effort. Sellers should be aware that there is a delicate balance of practice profitability versus current market conditions, and the M&A advisor can help educate sellers on the current market for their practice type and geography, and how this could change positively or negatively by taking more time to further enhance the asset being sold. This should be the first step in the seller's decision-making process.

Pick Off Easy Wins

As a sell-side advisor, I can attest that many dental practices go for years neglecting to negotiate simple things like supply costs, lab costs, etc, and these may be significantly out of line with industry norms. Reigning in costs seems like an easy fix, but many large offices seem to overlook this. Practices can do this on their own or hire any number of outstanding companies to help streamline some of these processes, which can yield significant results over the course of a year. For every dollar saved, a practice may realize $5, $6, $7 or more dollars based upon the exit multiple. In other words, if the practice can save even $20,000 a year across multiple cost categories, that will work out to well over $100,000 at the time of sale.

Pay Down Debt

Before embarking on the topic of paying down debt, potential sellers should first talk to their accountant regarding any and all tax considerations, including their personal income/tax situation.

That being said, nothing is more demoralizing than selling your business and having to pay off all of your business debt prior to receiving any funds at closing. A dental practice needs to be reasonably modernized-period. Buyers, of course, will want a practice that is capable of functioning within their ecosystem somewhat comparably to their existing group of practices. This may include a digital workflow and radiography, intraoral cameras and scanners, etc. However, in the few years prior to selling, the practice does not need to replace all of its chairs or purchase all the latest $50,000-$150,000 gadgets that were on display at a recent trade show. Modernizing should be done strategically and intelligently.

Renegotiate Your Lease

Many localized landlords are not especially familiar with the dental service organization (DSO) space, believe it or not. Having an assignable lease that has 3 or more years left on it, provided it's at a reasonable market rate, will be viewed positively by potential buyers. Dentists can benefit from utilizing a specialty group when negotiating a healthcare lease (whether an initial lease or an extension), as such a group will be fully versed in the type of lease buyers are looking for, how to beneficially structure it for the seller, and what the current rates are. They typically also are relentless negotiators and will fight for every penny, making it well worth the effort to contact them.

Streamline Your Provider Contracts

The number one concern of any buyer will likely be staff, and specifically provider retention. While it is somewhat unusual, having multi-year assignable associate contracts with clear compensation structures will go a long way in appeasing the buyer. While a clear compensation structure is organization-specific, in general 30% of net collections, $1,500 in continuing education provision, and 50% of lab responsibility comprise a good starting point. These figures should transition well to most buyers, and the net benefit to the associate will be tangible based on lower lab costs, higher reimbursement rates, etc.

Goals (Personal and Professional)

In the competitive process an M&A advisor runs, the seller will be faced with many tough decisions. The seller will probably receive offers from several suitors, all of which will likely present varying value propositions, timelines, deal structures, and post-close expectations. The M&A advisor will rank each offer based on the goals of the seller. Often, the highest enterprise value offer is not the best offer for the seller. In fact, in my experience, more often than not sellers don't accept the highest value offer. A myriad of factors goes into a selling decision, the most important of which encompass the seller's specific post-close goals. This may include monetary compensation up front and on an annualized basis, commitment timeline (in years), ongoing involvement in the business, willingness to re-invest a portion (up to 40%) in the localized or holding company business, interest in mentoring new team members, and so on. The more sellers understand how they want the next several years of their professional career to progress, the easier it will be to narrow down the scope of buyers that will be able to satisfy those goals.

Talk to Your Accountant and/or Wealth Planner

As a potential business seller, you can't truly understand your needs going into a sales process without conversing with your financial team. Practice sales are at a valuation level at which generational wealth is being created for the selling doctors. Your financial needs will play a major role in how the M&A advisor approaches the marketing of your practice to buyers and how it slots certain deal structures over others. Many of these financial decisions take time to develop and execute, and having the requisite conversations with your advisors 18 to 24 months in advance will help you be fully prepared financially and from a tax strategy standpoint.

Conclusion

As a former buy-side representative for a national DSO, I know that sellers are smart to have an advocate on their side throughout the process. The seller's valuation will be significantly higher and will easily outpace the M&A advisor's commission. Such an advisor will be voracious in searching for additional EBITDA and defending that throughout the quality of earnings process, and serve as an advocate throughout the closing/legal process, helping ensure that the seller's post-close goals are met. Having good expert counsel is perhaps never more critical than during the sale of one's life's work. For dental practice owners considering an exit in the next couple of years, now is the time to take a critical look at your business and make any course corrections necessary to improve both the attractiveness and valuation of it.

About the Author

Josh Swearingen
Director, Mergers & Acquisitions, TUSK Partners, Charlotte, North Carolina (tusk-partners.com), a dental M&A advisory firm for large practices and DSOs

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