When not to sell your practice: The importance of preparation and timing

Having spent over 30 years in the dental industry, I've had the privilege to consult countless practices. This experience, combined with my years as a practice broker, has given me a deep understanding of what makes a practice truly ready for sale and what doesn't.

Kim McCleskey.

Timing and preparation are everything when it comes to selling your dental practice. As the dental industry continues to consolidate, the pressure to sell can be intense, especially from buyers and brokerages eager to close deals. But I've seen firsthand how rushing into a sale can lead to unfavorable terms and missed opportunities, impacting both your immediate and long-term financial outcomes.

Navigating industry consolidation and broker pressures

The dental industry is experiencing a wave of consolidation, with dental service organizations (DSOs) rapidly acquiring practices -- a trend that's expected to continue over the next five years. This has led to increased pressure from both buyers and brokers eager to close deals quickly, often at the expense of the seller's best interests.

Unfortunately, not all buyers and brokers have your priorities in mind. Some may pressure you to sell before you're truly ready, pushing you into decisions that favor the buyer more than you.

In some cases, dentists are approached directly by DSOs and rely solely on the DSO's valuation of their practice. This is akin to selling your home and letting the buyer determine the price -- it rarely works out in the seller's favor.

In some cases, we've even had clients come to us after a deal has gone through with another broker, needing help to unwind it due to unfavorable terms. Legal fees quickly add up in these situations, further eroding the value of the sale.

While it may be tempting to sell quickly, it's important to have a third party advise you to ensure your priorities and interests are top of mind and that you have the time and resources to make the best decision for your future.

A good adviser should act as a fiduciary, meaning they are legally and ethically bound to act in your best interest, even if that means advising you to wait before selling. To protect your interests, look for a broker who offers objective advice and is committed to finding the right fit for you rather than just closing a deal.

Understanding your practice's true value

Many dentists are completely unaware of their practice's true value. I've facilitated hundreds of practice transitions, and in my experience, I estimate only about 20% of dentists know their practice's worth.

This knowledge gap can lead to undervaluing your practice and accepting a lower offer than you deserve. This is where the valuation process becomes critical. A comprehensive valuation conducted by a trusted adviser can help ensure that you have a fair and accurate understanding of your practice's value. A valuation not only helps you avoid selling for less than your practice is worth, but it also provides a clear picture of what improvements could help your practice grow in value.

Determining your dental practice's worth is not a simple, straightforward calculation, and the acumen of a seasoned valuation expert can significantly impact your financial outcome. Working with a certified public accountant (CPA) versus a broker specializing in dental practice transitions can give you different results.

Many CPAs may calculate the seller's discretionary earnings but mistakenly label it as earnings before interest, taxes, depreciation, and amortization. This misidentification can lead to misinformation and affect your decision-making.

Getting all the facts: The importance of a prospectus

Before making any decisions about selling your practice, you need to have all the facts. As part of the valuation process, this begins with obtaining a comprehensive prospectus, a document that carefully examines every aspect of your business.

A well-prepared prospectus includes detailed financial data, such as production and collections, accounts receivable, and other key performance indicators. It should also cover practice demographics, including active patient count and referral patterns, and offer insights into the future potential of your practice.

A prospectus does more than value your practice, it identifies areas that may need improvement before you should take your practice to market. For example, if your accounts receivable are high compared to your monthly collections, it may indicate that you're not collecting money as efficiently as you could be.

Similarly, if your payroll is higher than the industry standard -- typically around 28% of collections -- it might be a sign that you're overstaffed. Understanding these metrics and making adjustments ahead of selling often significantly increases the practice value.

An experienced broker should help you identify your practice's strengths and pinpoint areas for improvement. This is crucial because making targeted improvements can significantly enhance your practice's value. Without making these changes, you risk selling prematurely and leaving money on the table.

Key indicators on when it's time to sell

Several key indicators can signal that it's the right time to sell your practice. Look for signs such as well-managed overhead expenses, a strong production and collections record, and alignment with your personal and financial goals. For example:

• Accounts receivable: If accounts receivable are well managed and not excessively high compared to monthly collections, it indicates efficient money collection.
  
  
• Payroll: Payroll should be around 28% of collections. If it's significantly higher, it might signal overstaffing and inefficiencies.
  
  
• Labs and supplies: For general dentistry, supply costs should be about 14% of collections. If you're in a specialized field like implantology, costs may be higher, but they should still be within a reasonable range relative to collections.
  
  
• Rent: While rent is less flexible to control, understanding its impact on your cash flow is crucial. It's important to monitor how it aligns with other financial aspects of your practice.

Preparing your practice for sale

Properly preparing your practice for sale is critical to maximizing its value. The process involves more than just organizing financial documents -- it's about aligning your practice operations with your end goals.

By understanding your overhead expenses, production, and collections, you can make informed decisions that bolster your practice's financial health. An experienced dental practice broker can also guide you to advisers and consultants who can help you make necessary changes before selling. 

How long does it take to make changes?

Every practice is different, and there's no one-size-fits-all answer to how long it takes to prepare your practice for sale. Depending on your goals and the specific changes needed, it could take anywhere from six to 18 months.

However, taking the time to make these improvements can pay off significantly when it comes to the final sale price. Think of your practice as an investment: By treating it as such, you can maximize its value when the time comes to sell.

Bottom line

Selling a dental practice is a major decision that shouldn't be rushed. However, with the consolidation wave currently at its peak, dentists need to balance careful planning with timely action. The current trend offers a limited window of opportunity, making it essential to prepare your practice thoroughly now to maximize its value when you sell.

Taking the time to gather all the facts, preparing your practice for sale, and seeking guidance from experienced advisers can help you make a well-informed decision. Assess your options carefully to ensure that when you do decide to sell, you're positioned for success and can take full advantage of the current market conditions.

Kim McCleskey is a practice transition consultant with Professional Transition Strategies. She has worked in dentistry for more than 30 years and is a certified professional business coach. She can be reached at [email protected].

The comments and observations expressed herein do not necessarily reflect the opinions ofDrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.