As dental professionals contemplate selling their practices, I see many with the same hurdle: They lack a clear understanding of their financial needs and, by extension, their financial exit goals. This knowledge gap can significantly impact the outcome of a sale and, ultimately, the ability to achieve their desired goals and outcomes. Without a defined financial target, dentists may find themselves in situations where their practice transition doesn't meet their expectations, potentially forcing them to work longer than planned or settle for less than they hoped.
Understanding the financial value of your practice
Kim McCleskey.
Many dentists think of their practices as places to provide specialized care, but it's important to recognize that these practices are also valuable investments. Treating it like an investment -- beginning with a clear financial target -- helps shape your transition plan and gives you a better understanding of your practice's profitability potential.
This is especially important because many dentists don't know the exact financial amount they need to get from selling their practice to meet their personal and professional goals. For example, you might not realize that you need to make a specific amount from the sale to ensure financial security, gain more freedom in your work, or achieve other goals. Without knowing this number, it's hard to figure out what changes you need to make in your practice to reach it.
Why you need the right advisers on your team
A financial adviser with expertise in the dental industry is essential when determining your target number for the sale of your practice. Advisers who lack experience in dental practice transitions often have a limited understanding of the current consolidation landscape, which can complicate or even derail your transition. Without this specialized knowledge, they may fail to recognize key market trends or undervalue your practice, putting your financial goals at risk.
An experienced adviser, on the other hand, can help you establish financial goals and pinpoint the exact amount required to achieve them through the sale of your practice, taking into account both your personal financial needs and the broader market dynamics. This foundational step helps ensure you have a comprehensive understanding of your needs, whether those needs include financial security, more freedom, or fulfilling other long-term goals.
Once you've established these goals with your financial adviser, you should bring in an experienced dental practice broker. Collaborating early with both professionals helps make sure that your financial adviser and broker are aligned, working together to maximize your practice's value and achieve your desired outcome.
A skilled dental broker can provide critical insights into market dynamics, buyer expectations, and valuation strategies, using their industry expertise to position your practice for a lucrative sale and help you stay on track with your financial goals throughout the process.
By enlisting both a broker and a financial adviser with expertise in the dental industry, you gain a comprehensive plan tailored to your needs. Their specialized knowledge ensures that every aspect of your transition, from understanding your goals to preparing your practice for sale, is managed thoughtfully and effectively, giving you the confidence to focus on a successful transition that aligns with your vision for the future.
Steps to identify your financial number
Figuring out your specific financial needs can be more complicated than you might expect, especially without prior planning. Here are some key aspects to discuss with your advisers:
- Current and future earnings: Assess how long you plan to continue working and how this will impact your income. Are you planning to scale back, or do you intend to maintain your current level of production?
- Asset diversification: Evaluate your current investments and their potential returns. Are they aligned with your long-term goals?
- Profitability metrics: Your financial adviser can help analyze your practice's financial statements, focusing on key metrics such as cash flow, revenue trends, and overall financial health. They'll work with you to understand these numbers and ensure they align with your financial goals while a broker can focus on more specialized metrics like EBITDA (earnings before interest, taxes, depreciation, and amortization) to establish your practice's value when selling to a DSO.
Valuations: Establishing your baseline
To help determine your financial target, you may need to work backward. For example, if your adviser tells you that you need to net $1 million from the sale, you can break down what that target looks like both operationally and in terms of the valuation of your practice. A valuation is the process of determining the fair market value of your dental practice, accounting for factors like the type of dentistry, including its specialty; the types of procedures performed; the location; patient base; and revenue trends to give an accurate assessment of its worth.
An accurate valuation from an experienced dental practice broker provides a concrete baseline, helping you, your financial adviser, and your broker have a clear plan forward. Knowing your practice's value now can allow you to assess whether it aligns with your financial goals or if adjustments are necessary.
Maximizing practice value through expert guidance
Once you have this financial snapshot, you can have more meaningful conversations with your expert team about what's achievable and which areas need attention. If you find that your current valuation doesn't meet your financial goals, brokers can help identify strategies to boost your practice's value through operational efficiencies, profitability improvements, and more, which can help ensure that your transition aligns with your desired outcome.
A seasoned dental practice broker can also guide you to advisers and consultants who specialize in dental practices and can help you make strategic changes before selling. For example, some brokers have a network of vetted experts and options, and they can point dentists toward trusted solutions quickly and confidently.
For instance, consider an orthodontist we worked with in the East Bay. This orthodontist, who had a deep understanding of his practice's financials, sought to achieve a substantial sale price. He worked closely with his accountant and our team to understand the market dynamics, and this preparation allowed him to align his exit strategy with his long-term goals. With an EBITDA of $3.3 million and a 67% margin, he knew his business inside and out. Initially, he aimed for a $21 million sale price, but after carefully analyzing the numbers, he increased his target to $23 million.
We structured his deal using a joint venture (JV) model -- a 60/40 split, where he retained 20% of the business and rolled 20% of the equity into the holding company. At close, he secured about $13.9 million in cash, with the remaining 40% held in the holding company. This deal structure allowed him to capitalize on his practice's value, ensuring he received immediate liquidity while maintaining a long-term interest in the business.
Throughout the process, he worked closely with experts to gain a deeper understanding of his practice's financials, private equity, valuation multiples, and the dynamics of specialty practices. At the same time, he took the initiative to educate himself on these topics, which empowered him to make the most informed decisions. This proactive approach helped him achieve a sale price that not only met but exceeded his expectations, setting him up for financial success after the sale.
The consequences of undefined goals
Entering the sales process without a defined financial goal can lead to frustrating outcomes. Many sellers work longer than intended, only to find that their practices do not meet their financial expectations. For example, a dentist who undertook a costly remodel late in their career found themselves in a precarious position. While they cleared some debt through the sale, they may still have insufficient equity for a comfortable retirement.
Consider the case of a solo practitioner we worked with located in Santa Rosa, CA, who was producing $1.4 million but had high overhead costs. Despite a solid practice, her EBITDA margin limited her potential sale price. By identifying her financial goals early, we were able to guide her through adjustments that ultimately increased her profitability. This included optimizing her reimbursement practices and addressing payroll inefficiencies.
Making informed changes to increase profitability
With a clear financial target, sellers can take strategic steps to enhance their practices' value before entering the market. These may include the following actions:
- Streamlining operations: Identifying inefficiencies and reducing unnecessary overhead
- Improving collections: Working with your team to ensure billing and collections processes are optimized
- Investing wisely: Making informed decisions about technology and staffing that align with your long-term goals
The goal is to create a practice that not only meets your immediate needs but also positions you favorably in the marketplace.
Bottom line
As a dental professional considering selling your practice, understanding your financial goals is a critical first step. Collaborating with a knowledgeable team, including your dental practice broker and a financial adviser, can provide you with the needed insights to define your exit strategy and make informed decisions about your practice's future. By prioritizing this planning process, you can help ensure a smoother transition that aligns with your financial aspirations. Remember, your practice is not just a job; it's an investment vehicle to achieve the financial freedom and lifestyle you've worked hard for, allowing you to live on your terms and secure your future.
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 of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.
.hpp4JFpXkV.png?crop=focalpoint&fit=crop&fp-x=0.5&fp-y=0.5&h=167&w=250&auto=format%2Ccompress&q=70)
